Pros & Cons of Pre-Paying your Personal Loan

Applying for a personal loan is the first thing that comes to mind when it comes to addressing urgent needs. This financial instrument’s success can be due to its versatility, ease of use, and lack of excessive paperwork. However, for a variety of reasons, you might choose to end your personal loan account before the term is up. Some of the frequent ones include having the means to pay back the loan, paying less interest, raising your credit score, transferring your loan, etc.

Pre-paying a personal loan typically has benefits for the borrower. There are advantages, but as they say, every coin has two sides, therefore there are also some drawbacks. In order for you to make an informed choice, we have discussed the benefits and drawbacks of prepaying a loan in this article.

Advantages of Pre-Paying a personal loan

It is smart to pay off your debt before the loan term is through. Here are some of the well-known benefits of paying off a personal loan early that will help you see how it benefits you.

Helps improve credit score

Prepaying your loan relieves your debt burden while improving your credit score. By repaying your loan in a timely manner, you may keep your credit score high. In addition, since your credit score is impacted by the total amount of debt you owe, prepaying personal loans in full or in part will instantly raise it. Your chances of getting approved for your next loan faster will also increase if you have good credit, and prepaying your loan will even allow you the opportunity to bargain better terms with the lender.

You can save the cost of interest

Prepaying your personal loan as soon as possible can enable you to reduce your interest costs. When you pay off your personal loan early, there is a tiny pre-payment penalty. The bank will not get the interest you would have paid over the course of the loan if you choose to close the account before it matures. As a result, they assess a pre-payment fee. But if the interest yield is significant, this is a pretty little price to pay. The best thing is that you are free to keep the money or, if you wish, think about investing it in mutual funds or fixed deposit plans now that you are not obligated to pay the personal loan’s monthly interest.

Makes you go debt free early

The quick cash personal loan app has made it simple to apply for a personal loan, but you should be sure that you will be able to pay it back before you do. Although you choose the loan’s term based on your ability to pay, you may be able to lower your debt-repayment rates or, even better, eliminate all of your debt by prepaying your personal loan. In addition to the financial benefits, not having to worry about paying payments each month for a long time will ease your stress and speed up the process of you reaching financial independence.

Reduces your burden of debts

Due to financial constraints, you are unable to prepay the entire loan amount with your monthly income. Additionally, your salary was the main factor in the decision to choose a lengthier loan term in the first place. However, you might want to consider prepaying some of your personal loans if you have received a bonus or another source of income. Even though partial prepayment may not allow you to completely eliminate your debt, it does help you reduce it. Partial prepayment will result in a reduction in the interest that must be paid on the total outstanding loan balance. Therefore, if you have gotten a bonus and intend to prepay your loan balance, we suggest you do so without second-guessing yourself.

Disadvantages of Pre-Paying a Personal Loan

High pre-payment charges

When you decide to pay back a loan, the bank forfeits the interest it would have otherwise received if the borrower had repaid the loan in full over the course of the loan’s term. To compensate for the loss of this potential income, the majority of financial institutions charge the borrower a fee when they decide to prepay their personal loan. Certain institutions may charge these fines/fees at a fixed rate or with interest over a predetermined time. Pre-payment penalties typically range between 4% and 5% of the total principal amount of the personal loan. In many situations, lenders also forbid borrowers of personal loans from closing on their properties or making partial prepayments until the end of a certain number of EMIs.

losing a sizable sum of money all at once

Many borrowers prepay their personal loan balance using cash on hand, capital from investments, or a bonus. However, there are certain drawbacks to that as well. Your ability to manage any monetary emergency brought on by events like the loss of income, health issues, or other unforeseen circumstances is eliminated if you prepay your debt. Then, in order to overcome your financial problem, you may search for another solution, borrow from an existing investment that you had saved up for another use, or even consider taking out a new loan. In this situation, you will once more fall into the trap and occasionally risk becoming imprisoned by debt.


Personal loans are a great financial tool to meet your demands, and you may also apply for loans online. A personal loan might help you out with big-ticket purchases, wedding expenses, vacation expenses, and medical emergencies. Before using this facility, there are a lot of things you need to think about and research so that you can pick the ideal lender and plan. By picking the best lender and thoroughly understanding the terms and circumstances, you can save a lot on your loan.


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