- By Aditya Pratap Singh
- Mon, 24 Mar 2025 02:44 PM (IST)
- Source:JND
Pre-Closure of Personal Loan: Taking personal loans has become an easy habit for working professionals, many of us take personal loans at one time or another to meet our expenses. However, we all have heard from our elders that loans are a burden that should be repaid as soon as possible. Banks do give a chance to pay loans before tenure and that is known as Pre-closure, or repaying a personal loan before its tenure. However, it has its pros and cons.
Personal loan pre-closure: What is it?
Repaying the entire loan balance before the planned closing date is called pre-closure. For people with extra money who want to repay their debt as soon as possible, this is the best option.
Since interest accrues over time, borrowers can reduce their interest payments by closing the loan early. Pre-closing can also boost credit scores, making it easier to get better terms on future loans.
Benefits of repaying a loan early
Interest savings: The total interest amount to be paid reduces with a shorter loan tenure.
Improved credit score: Repaying the loan ahead of time improves your credit profile and increases your chances of getting a loan in the future.
Financial freedom: Termination of monthly EMIs ahead of time enables better financial planning and peace of mind.
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Disadvantages of loan pre-closure
Pre-closure fees: Many banks charge 2%-6% pre-closure fees, which can reduce the overall benefit.
Opportunity cost: The interest savings from pre-closure may not be as profitable as investing the extra money in high-yielding assets like stocks or mutual funds.
Liquidity issues: If you use a large amount to pay off the loan ahead of time, you may not have enough money for unexpected expenses or new ventures.
RBI's New Pre-Closure Regulations
On February 21, 2025, the Reserve Bank of India (RBI) issued new guidelines that will eliminate pre-payment fees for personal loans with variable interest rates. This rule will help borrowers by facilitating early repayment without any additional charges when implemented. By March 21, 2025, RBI sought inputs on this proposal from the general public and interested parties.
Is it advisable to close your loan early?
If you have extra money and have budgeted for future expenses, closing your loan early can be a sensible option. However, pre-closure fees, interest savings, alternative investment options and your current financial stability are all important considerations.
Important: Before making a choice, always confirm the applicable fees and terms with your lender as pre-closure terms vary between banks.