It is not necessary that the decision of loan prepayment should always be beneficial. Prepayment penalty is also charged in some loans. In such a situation, you should do calculations before taking the decision of loan prepayment so that you know whether your decision is profitable or not.
In today’s time, people take loans to fulfill all their needs ranging from house to car. By taking a loan, your work gets done, but the liability of repaying it increases. Their EMI has to be paid for many years. In such a situation, paying the installment every month starts becoming a headache. In order to settle the loan as soon as possible, many times people choose the option of prepayment. But it is not necessary that the decision of prepayment is always beneficial. Prepayment penalty is also charged in some loans. In such a situation, you should do calculations before taking the decision of loan prepayment so that you know whether your decision is profitable or not.
Know why banks charge loan prepayment penalty
The calculation of how much interest will be charged on the loan depends on the loan tenure of the borrower and the EMI is prepared accordingly. But if you choose the option of prepayment in the middle of the tenure, then the banks are not able to charge you the same interest as they could have charged in your entire tenure. In such a situation, they compensate for this loss through loan prepayment penalty. However, not all lenders impose prepayment penalty. Prepayment penalty is included in the terms and conditions. Some lenders charge fixed penalty while some charge it on percentage basis. Therefore, whenever you take a loan, understand its conditions carefully.
Do these calculations before deciding on prepayment
To understand whether the decision of loan prepayment is beneficial for you or not, first check whether prepayment penalty is mentioned in the loan terms or not. If not then you can take this decision. If prepayment penalty is being charged on the loan then you should do a calculation. Only after this reach any conclusion.
First see how much penalty will be charged for repaying the loan early. After this, calculate the total interest to be paid on your remaining loan. After this subtract the penalty from the interest. After this, decide according to the answer you get. If you are saving a good amount in interest even after paying penalty, then you can decide on loan prepayment. If the situation is the same, then you will get only one benefit of loan prepayment, that is, you will get freedom from EMI. Take a decision after looking at your situation. Whereas if you feel that the answer is negative, then you will incur loss due to prepayment, in such a situation it would be wise to repay the loan in its entire tenure.
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