What is the financial impact of early repayment or prepaying?

Prepaying or making an early repayment on your personal loan can have a significant financial impact, both positive and negative, depending on your loan terms and financial goals in 2025.

Benefits of Early Repayment:

• Interest Savings: A decrease in the total amount of interest you pay over the course of the loan is the most obvious benefit. You can save a lot of money by paying off the principal balance early. This is especially true for loans with higher interest rates or longer terms.
• Lower Debt Burden: Clearing your loan early reduces your overall debt obligations, freeing up your monthly cash flow for other financial goals or investments.
• Credit Score Improvement: Successfully closing a personal loan ahead of schedule can positively affect your credit score as it demonstrates strong repayment capacity as well as lessens your unsecured debt load.

Potential Drawbacks:

• Prepayment or Foreclosure Charges: Many lenders impose a prepayment penalty or foreclosure fee often ranging from 2%* to 5%* of the outstanding principal. Some lenders also require you to pay a minimum number of EMIs before you can prepay the entire loan.
• Opportunity Cost: Using surplus funds to prepay a loan means you may miss out on potentially higher returns from alternative investments.

Things to Consider:

• Always calculate the net benefit by comparing the interest saved against the prepayment charges.
• Inform your lender in advance and follow the prescribed process to ensure the loan account is closed correctly and your credit report is updated.
• For floating rate personal loans, note that the Reserve Bank of India has prohibited prepayment charges, but fixed-rate loans may still attract such fees.

Early repayment can be financially advantageous, but it is important to weigh the savings against any penalties and your broader financial goals before making a decision.