Personal loan borrowers can easily save the interest cost by prepaying the outstanding loan amount. For example, if an individual borrows a personal loan of Rs 10 lakh at 13% p.a. for tenures of up to 5 years, the EMI would be Rs 22,753 and the total interest cost would be Rs 3.65 lakh. If the borrower prepays the outstanding loan amount after a year, the savings on interest cost would be up to Rs 2.44 lakh.
Canara Bank Personal Loan Pre-closure Charges
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Benefits of Pre-closing Personal Loan
Savings on Interest Cost
Lower Proportion of Unsecured Loan Credit Mix
Credit mix is the ratio of secured and unsecured loans. Canara Bank Personal Loans are unsecured loans. Hence, personal loan pre-closure would reduce the proportion of unsecured loans in credit mix. Increased proportion of secured loan improves the credit score of the borrowers and increases their chances of getting loans in future.
Increased eligibility for additional loans
Loan applicants whose EMI/NMI ratio (including existing EMIs and EMIs of the proposed personal loan) is within 50-60% have higher chances of getting their loan applications approved. Lenders do not usually consider the applicants exceeding this limit. Thus, applicants considering to avail additional loan facility can reduce their EMI/NMI ratio by making prepaying their existing loans thereby improving their eligibility for personal loans, home loans, etc.
Disadvantages of Pre-closing Personal Loan
Negative Impact on Liquidity
Many borrowers use their existing investments for making prepayments. Some also end up using their emergency funds to prepay their personal loan. While using emergency fund to prepay personal loans would reduce their ability to deal with emergency situations like medical emergencies, loss of income due to job loss or illness or other financial exigencies etc., using existing investments to make prepayments might adversely impact the achievement of their crucial financial goals. Thus, using emergency fund or existing fund to prepay personal loans might force one to avail loans at higher interest rates to deal with financial exigencies or achieve his crucial financial goals. Therefore, personal loan borrowers should prepay their personal loans only if they have adequate emergency fund. They should also avoid prepayment by redeeming their existing investments earmarked for crucial financial goals.
Instead, borrowers wishing to reduce their repayment burden and interest cost can opt for personal loan balance transfer facility wherein they can transfer their existing personal loans to other lenders offering lower personal loan rate of interest.
Pre-closure Charges
As Canara Bank offers personal loans at floating interest rate, it cannot charge any pre-closure fees from its personal loan borrowers. However, in case of personal loans availed at fixed interest rates, lenders are free to charge prepayment or foreclosure charges. In such cases, prepaying personal loans would reduce the overall savings in interest cost. Hence, the borrowers should opt for prepayment only if their net savings in interest cost is significant enough after accounting the pre-closure charges.
How Can I Apply for a Personal Loan Online?
Get up to ₹40 Lakh in 5 Simple Steps
Step 1: Enter your mobile number in the application form
Step 2: Provide your personal details
Step 3: Enter OTP to verify your mobile number
Step 4: Select the loan purpose and loan amount
Step 5: Compare offers and apply for the best-suited loan
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View All ArticlesPaisabazaar is a loan aggregator and is authorized to provide services on behalf of its partners.
The APR (Annual Percentage Rate) of a personal loan is its annualised cost of borrowing, which includes the interest rate as well as the processing fees, documentation fees and other fees charged during the loan origination. The APR is expressed in the form of a percentage and thus, allows personal loan applicants to detect personal loan schemes offered at lower interest rates but with higher processing fees and/or other charges.
The APR of personal loans usually ranges between 11.29% to 35%. For example, assume that you have availed a personal loan of Rs. 5 lakhs @ 10.50% p.a. with a repayment tenure of 5 years. The processing fee charged for this loan is 1.5% of the loan amount, which amounts to Rs 7,500. Therefore, the total borrowing cost of your personal loan will be Rs 1,52,317 and its APR will be 11.16%.
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