According to a recent report, around 77% of working individuals in India rely on unsecured personal loans to make their ends meet. One of the reasons behind such figures is that these loans do not come with any end-use restrictions, and hence borrowers can use them for any purpose.
However, prospective applicants must be aware of certain vital aspects like the prepayment penalty before acquiring a personal loan.
Ways to avoid a prepayment penalty
All loan products come with a particular tenor, and the lending institutions expect a certain amount of interest income from the product over time. Hence, lenders earn a lower interest amount when borrowers choose to repay a loan quicker. That is why the lending institutions charge a prepayment penalty to compensate for the loss.
However, there are certain ways individuals can avoid paying this penalty. For instance, by opting for a loan at a floating interest rate, one can prevent prepayment penalties and foreclosure charges.
Individuals must also avoid opting for frequent refinancing from their lending institutions. Frequent refinancing indicates a lending institution that the borrower is more likely to refinance as soon as the rates dropdown.
When is the right time to opt for a personal loan prepayment facility?
Apart from the various ways to avoid a prepayment penalty, individuals must consider certain aspects before choosing this credit facility. Deciding on the appropriate timing for a personal loan prepayment depends on an individual’s financial goals and other calculations. Illustrated below are some instances where a personal loan prepayment comes to the effect:
- When a significant period of the loan tenor is remaining
Prepaying a personal loan will prove to be beneficial for a borrower when there is still a significant period of loan tenor remaining. Additionally, lending institutions can even charge on personal loan prepayment at a certain rate of the outstanding balance, including taxes. Therefore, if a loan has run for an extended period, the borrower would have already paid quite a decent amount. Hence, the applicable prepayment charges will be substantial, further leading to a drastic reduction in savings.
When a considerable loan amount is involved
If an individual has acquired a substantial amount through a personal loan, it might be challenging to pay it off before the original loan tenor. But one can choose to pay a portion of the outstanding loan balance and lower the interest payments.
Some reputed financial institutions allow borrowers to opt for part prepayment on personal loans. Therefore, individuals must check with their respective lending institutions regarding this facility.
Besides this, there are other advantages of choosing reputed lenders. For instance, individuals can benefit from several pre-approved offers extended by reputed financial institutions. These are offered on both secured and unsecured financial products. They help simplify and accelerate the lending process. Individuals can check their pre-approved offers by providing a few details, such as their name and contact number.
When one has multiple debt obligations
Individuals can reduce their financial burden when faced with several debt obligations by opting for part prepayment. After part prepayment, they can again go for the same EMI. Choosing this procedure will ensure that they are relieved quickly from multiple debts.
Tax benefits on personal loans
Apart from these, prospective loan applicants must note that they can enjoy personal loan tax benefits according to the Income tax act 1961. As per this act, there are certain scenarios that can help individuals lower their tax outgo. The various scenarios for tax benefits of a personal loan are given below:
Construction or purchase of residential property
According to section 24 (b) of the income tax act, individuals can enjoy tax deductions if they use a personal loan for constructing or purchasing a residential property.
Purchasing other assets
Using a personal loan for buying assets like jewelry provides tax benefits to borrowers. Individuals can claim tax benefits as and when they sell the asset.
For expanding business
Individuals using a personal loan to finance business expansion can claim the interest they pay towards the loan.
Having mentioned all these, it is imperative to note that personal loan tax exemption for salaried individuals is not available.
Therefore, personal loan borrowers willing to pay off their loan ahead of their schedule must consider the various details related to the prepayment penalty mentioned above. Additionally, prospective applicants must calculate personal loan EMIs before applying.