SBI Personal Loan Preclosure Charges

Interest cost savings

Borrowers can save on the interest costs they would have otherwise incurred during the entire loan term. For example, if an individual avails a personal loan of Rs 10 lakh at 13% p.a. and repayment tenure of 5 year, then the EMI would be Rs 22,753 and the total interest would be Rs 3.65 lakh. However, if the individual repays the outstanding loan amount after a year, he/she can save interest costs of up to Rs 2.44 lakh.

Lower proportion of unsecured loans in credit mix

Credit mix refers to the ratio of secured and unsecured loans. Since SBI personal loans are unsecured in nature, prepaying the personal loan would reduce the proportion of unsecured loans in the credit mix. An increased share of secured loans helps improve your credit score and thus, increase the chances of availing another loan.

Increased EMI affordability

Banks prefer lending to loan applicants whose total EMIs (including the existing EMI and the EMIs for new loans) are within 50-60% of their total monthly income. Therefore, applicants exceeding this income limit have less chances of availing loans. However, one can easily improve their loan eligibility and reduce the EMI/NMI ratio if they choose to prepay their existing personal loan.

Negative impact on liquidity

Many borrowers use up their existing investments to prepay their personal loans, which affects their emergency funds that they would have otherwise used in situations like medical emergencies, loss of income or any other such contingencies. This can further force the borrowers to avail personal loans or other loan facilities at higher interest rates for meeting their financial goals or for dealing with financial emergencies. In order to avoid this situation, borrowers should only consider prepaying their personal loans if they have sufficient emergency funds. It is also better to avoid using their existing investments meant for any unforeseen financial goals. Instead, personal loan borrowers having restricted liquidity can reduce their repayment burden and interest cost by opting for personal loan balance transfer facility wherein they can transfer their existing personal loan to lenders offering lower personal loan interest rates.

Prepayment charges

SBI charges a prepayment fee of up to 3% on the outstanding loan amount in cases of personal loans availed at fixed interest rates. Borrowers who wish to pre-close their personal loan accounts can do so by paying the prepayment charges, which will also reduce their interest cost savings. So you should only prepay your personal loan if you have enough net savings after accounting the prepayment charges of your personal loan.