Pre-closure of a personal loan is sometimes considered a financially prudent move. Paying off a loan sooner seems to save on interest and provide peace of mind. The actual question is whether that is the right move.
Many borrowers go into early closure without understanding that there are hidden costs, opportunity costs, or liquidity losses. Thus, this post helps you decide to pre-close your loan logically, not emotionally.
What is the Pre-closure of a Personal loan?
Pre-closure of a personal loan means paying back the full outstanding loan amount before your original tenure is over. After being pre-closed, your loan account is marked as closed, and you do not have to pay any further EMIs.
This is not part-payment, where you pay part of the principal to lower interest, but continue with EMIs. Generally, a lender allows pre-closure only after the lock-in period, which is usually after 6–12 EMIs, and a few lenders charge early-closure fees. Personal loan interest is calculated on a reduction basis, which is why pre-closure would matter.
Personal loans use a reducing-balance interest method, which calculates interest based on the remaining principal. On the other hand, EMIs have a characteristic of front-loaded interest, where you pay more interest in the earlier months and less principal.
Only early in the tenure, closing a personal loan is usually advantageous. In simple terms, the sooner you exit, the less interest you have to pay.
Advantages of Closing Early on a Personal Loan
Pre-closure of a personal loan has its own benefits, but the most noticeable one is huge interest savings, especially if you have a large interest rate on your loan.
With no EMIs, the monthly cash flow improves as the money will not need to go towards EMIs and can be used for investing, saving, or for lifestyle expenses.
This leads to another psychological aspect: being out of debt increases confidence and lessens financial tension.
Fewer active liabilities over time help credit utilisation and future borrowing. By pre-closing loans, borrowers who are unable to pay personal loan EMIs due to stretched budgets can regain their financial space.
Are There Any Personal Loan Pre-Closure Charges?
Pre-closure of a personal loan, though beneficial, comes at a price. The majority of lenders will then impose a foreclosure charge equal to 2 to 6% of the balance due. This is subject to gst, hence the effective actual charges increase.
While some loans prohibit pre-closure for a certain lock-in period. There may also be an administration or documentation fee. This makes a cost evaluation before making a decision a must, since disregarding these charges can lead to a sharp cut in your net savings. Pre-closure charges on a personal loan will impact your actual savings in the end.
How Pre-Closure Affects CIBIL Score
Most of the time, pre-closure of a personal loan will have a neutral to positive effect on your credit score. Paying off your loan is a responsible way to close a loan: it repays the balance and reduces outstanding liabilities.
But in the short term, there may be a minor fluctuation as the loan account closes. In the long run, the effect is typically beneficial, provided you have a diverse credit portfolio. Borrowing often, taking too many loans repeatedly, on the other hand, can indicate credit dependency and can go against it.
When Pre-Closing Makes Sense Financially
Pre-closure of a personal loan is usually a good decision when:
- You have a high interest rate on your loans (greater than 12 to 14%).
- You already have a good-sized emergency fund.
- You have just begun the loan term.
- No non-traditional investment has higher returns.
- Your income after closure is stable.
In these cases, early closure strengthens long-term financial management and does not weaken liquidity.
When to Not Pre-close a Personal Loan
In some cases, the pre-closure of a personal loan may not be a good idea. If you have a low interest rate on your loan or one that is near completion, the savings are inadequate due to the interest. Pre-closure penalties are high, and this can erode benefits even further.
Without emergency savings, borrowers can face liquidity risk if an unplanned expense arises. Also, if surplus money can yield a higher return on investment or be used for business expansion, then pre-closure is not an effective utilisation of the money.
Which Should One Opt For: Pre-closure or Part Payment?
A part payment allows you to lower your interest rate without losing liquidity. It benefits borrowers who want to save over time while avoiding running out of cash. But of course, that clearly does not happen with pre-closure, which dispenses with the debt entirely. Then, there are a few borrowers who employ a mixed strategy: they do partial payments in the early months and later, go for pre-closure of a personal loan as and when available cash grows.
Final Words
There is no one-size-fits-all answer. Pre-closure of a personal loan can be effective when you save more in terms of interest than you end up paying as a penalty, the loan is at its early stage (and in its interest costlier phase), and your financial conditions after closure are not affected negatively. Always calculate the net savings before making the decision.
Choosing the right lender can make this choice easier. Stashfin is a well-known digital loan provider with transparent charges, flexible repayment terms, and borrower-centric support. So whether you are preparing for early closure of your loan or looking for smarter alternatives to repay your online loan, Stashfin provides you with the expertise to determine your financial opportunity. Get your loan options today with Stashfin and make a well-informed decision.
