Federal Bank Personal Loan Preclosure Charges

Saving Interest Cost

Prepaying personal loans helps the borrowers to save their interest cost that they would have otherwise incurred during their loan tenure. For example, if an individual avails a personal loan of Rs 10 lakh at 13% p.a. for repayment tenures of 5 years, then his EMI would be Rs 22,753 and the total interest payable would be Rs 3.65 lakh. However, if he prepays the outstanding loan amount after a year, his savings on interest costs would be up to Rs 2.44 lakh.

Increased Eligibility for Additional Loans

Lenders usually offer personal loans to applicants whose EMI/NMI ratio is within 50-60% of their total monthly income, that includes their existing EMIs and EMIs of the proposed personal loan. Applicants exceeding this limit have lesser chances of getting their personal loans approved. Thus, applicants planning to avail additional loan facility can reduce their EMI/NMI ratio by prepaying their existing loans thereby improving their loan eligibility.

Lower Proportion of Unsecured Loan in Credit Mix

The ratio of secured and unsecured loan of an individual is referred to as credit mix. Federal Bank Personal Loans are unsecured loans. Thus, prepaying the personal loan will lower the proportion of unsecured loan in the credit mix. Increased proportion of secured loans would improve the credit score of the borrowers and increase their chances of getting loans in future.

Negative Impact on Liquidity

Many borrowers prepay their personal loans using their existing investments and emergency funds. Making prepayments using emergency funds might adversely impact the borrowers’ ability to deal with emergency situations like medical emergencies, loss of income due to job loss or any other financial exigencies.

Using existing investments might affect crucial financial goals of the borrowers. This might force the borrowers to avail loans at higher interest rates to fulfil their personal needs or any financial emergency. Therefore, the borrowers should make prepayments only if they have additional emergency funds. Personal loan borrowers can also reduce their repayment burden and interest cost by using personal loan balance transfer, i.e., by transferring their existing personal loans to other lenders at lower personal loan rate of interest.

Prepayment Charges

Federal Bank charges a prepayment fees of up to 3% for personal loans at fixed interest rates. Prepaying the personal loans also reduces overall interest cost savings. Therefore, the borrower should prepay personal loan only if their net savings in interest cost is sufficient enough after accounting the personal loan pre-closure charges.