Individuals are often faced with many financial challenges. At such times, borrowing funds through loans is a preferred option. Loans offer an excellent gateway to avail of finances during a cash crunch. Such loans are provided on the basis of the eligibility of the applicant. The principal amount then has to be repaid through regular Equated Monthly Installments (EMIs) over the loan tenure.
Borrowers may prepay the loan either through regular installments or make part payments in advance. Sometimes, individuals have an excess flow of cash, may be through a sale of some asset or any other reason. The received cash may then be used to prepay a loan. Prepayment of a loan refers to the early payment of the loan amount, either in part or in full. This reduces the balanced principal amount, thereby reducing the EMIs significantly.
However, it is important to consider whether prepayment is a profitable option or not. Most banks and lending institutions levy a prepayment penalty for partial or total prepayment. Lenders make profits through interest charged on the loan. When a prepayment is made, the borrower avails of lower interest rates. This, in turn, is a loss to the lender. Hence, the lender charges a prepayment fee to recoup the losses.
Pros of loan prepayment
Repaying the loan earlier than the scheduled date helps to reduce the principal and the interest amount to be paid in the future. This leads to borrowers making significant savings in the form of lower interest rates. Another benefit of prepaying is the tax benefits. Under Section 80 C of the Income Tax Act, individuals may avail of a tax deduction.
Cons of loan prepayment
The main disadvantage besides the prepayment charge is when the part prepayment is not sufficed to the loan amount. In case the prepayment amount is small, your will incur additional cost instead of saving. Hence, it is highly advisable to make a huge sum as a prepayment in order to reap the highest benefit.
Tata capital allows loan borrowers to prepay the loan amount either in part or in full. Borrowers may prepay the outstanding loan amount post 180 days of receiving the loan amount. Another important point Tata Capital personal loan borrowers need to keep in mind is that a maximum of 25% part prepayment is allowed if they wish to prepay the loan before 180 days. However, there is a 2% prepayment charge if they wish to prepay a higher amount.
It is important to weigh the pros and cons of prepayment option. It is advisable to opt for prepayment if the pros outweigh the cons. However, individuals must make a decision based on their financial position as well as their needs.