A wedding often costs more than planned, largely due to those countless last-minute expenses. After calculating my savings, emergency funds and the upcoming costs, I knew I needed some extra financial support for my wedding.
In January 2024, I decided to take a personal loan of Rs 5 lakh for a 3-year tenure at an interest rate of 12.5% p.a. My EMI came to around Rs 16,727. Over the 3-year repayment tenure, I would have paid about Rs 1.02 lakh in interest, making the total repayment amount Rs 6.02 lakh.
A Bonus in the Office Changed My Repayment Plan
I received a bonus at work which led to Rs 1 lakh lying idle in my bank account. I had two options:
- Keep it in my savings account and earn ~3% interest, or
- Use the bonus to part-prepay my personal loan.
After checking my loan account statement, charges and deciding between investment and prepayment, I opted for prepaying my personal loan.
Borrowers also have the option to invest the surplus funds for wealth creation, depending on their risk appetite, financial priorities, market conditions, etc. If you have a higher risk appetite, consider investing in stocks or equity mutual funds during bearish markets, as valuations are attractive during such market conditions. The returns generated from such investments made during bearish markets may easily exceed the savings made through personal loan prepayment.
Impact of Part-Prepayment
In January 2025, after payment of 12 EMIs, I paid Rs 1 lakh as a part-prepayment on my personal loan. To partially prepay your personal loan, you’ll need to contact your lender and may need to submit the necessary documents. Usually, you have two options in case of personal loan prepayment: –
- You can either reduce your EMIs for the same tenure, or
- You can reduce the tenure for the same EMIs.
I contacted my lender to reduce the tenure and here’s what happened next:
- My EMI stayed the same (Rs 16,727), but
- My loan tenure has been reduced from 24 months to 17 months
- The interest saved is Rs 22,764 approx
Charges on Prepayment
My lender charges 2% prepayment penalty on the outstanding loan amount (Rs 3.53 lakh). Considering the penalty, I saved over Rs 22,404.
Some lenders don’t charge prepayment fees after payment of a predetermined number of EMIs. So, check your loan agreement before you decide to make prepayments.
Takeaways Before Prepaying Your Personal Loan
- Prepay early, if possible, as you pay most of your interest in the early stages of your tenure.
- Use online prepayment calculators to understand how much EMI reduction or tenure reduction is possible.
- Know prepayment charges, as higher charges can increase the cost of your loan.
- Decide between investment and prepayments and know whether the interest cost savings outweigh the returns earned on investments.
- Calculate your emergency fund (usually for 6 months) before prepaying, as a financial emergency can come at anytime.
