Loan prepayment: You must note these facts
What's the story
Loan prepayment is a common practice among borrowers in India, allowing them to pay off their loans before the scheduled time. This can help save on interest and clear debts faster. However, it is important to understand the implications of prepayment, including potential penalties and benefits. Here are five important things every borrower should know about loan prepayment in India.
#1
Understanding prepayment penalties
Many lenders charge a fee for early loan repayment, known as a prepayment penalty. This fee varies by lender and loan type, often ranging from one to five percent of the outstanding amount. Knowing these penalties helps borrowers make informed decisions on whether to proceed with early repayment or stick to regular installments.
#2
Impact on credit score
While paying off a loan early may seem like a good idea, it can affect your credit score. A sudden drop in your credit mix and average account age can occur if you close an account prematurely. This is because your credit score is calculated based on various factors, including credit utilization ratio and payment history. So, it's important to consider how early repayment will affect your overall credit profile.
#3
Tax implications of prepayment
In India, home loan borrowers can avail tax deductions under Section 80C for principal repayments and Section 24(b) for interest payments up to ₹2 lakh annually on self-occupied properties. However, if you prepay your home loan early, you may lose these tax benefits on future payments since these accounts get closed sooner than expected.
#4
Financial planning considerations
Before opting for loan prepayment, it's essential to assess your overall financial situation. Consider whether you have sufficient emergency savings or if redirecting funds towards investments could yield higher returns than the interest saved from paying off a loan early. A balanced approach ensures that you don't compromise your financial stability by prioritizing debt repayment over other important financial goals.
#5
Choosing between partial/full repayment
Borrowers must decide whether they want to go for partial or full loan prepayments. Partial prepayments can reduce EMIs without closing accounts, while full repayments close accounts and eliminate future dues. This decision should be based on individual circumstances and long-term financial plans.