If a loan is taken and you need to repay it in the next 5 years, then you are required to pay monthly installments which comprise of EMI and interest for the next 5 years. However, a pre-closure of loan means that you can repay the complete loan amount before its pre-decided time period i.e. before 5 years.
Pre closing a loan, generally comprises some terms and conditions, depending on the bank.
So, it is always a great idea to consult your bank about the terms and conditions of pre-closing the loan.
When is it the ideal time to pre-close a loan?
Pre-closure of loan depends on your personal finances, so it can vary from person to person. Therefore, you can decide when it is the ideal time for you, based on your finances. If you have enough savings, have got a raise, or earned a bonus you weren’t expecting, then why not pre-close the loan and get rid of the debt?
When is it the best time to pre-close the loan and avail maximum benefits out of it?
- Generally, if a loan’s tenure is 5 years, then the majority of your early monthly installment or EMI of 1-2 years will consist of interest. So, as you progress towards the end of your loan period, the interest amount keeps on decreasing. Therefore, in this scenario, it is best to pre-close the loan, depending on your fund availability and the policies of the bank.
- Another thing to keep in mind is to study your tax benefits. If you no longer get tax benefits from your interest payments, then pre-closure could be a good option.
What are the benefits of pre-closing a loan?
Pre-closing the loan has a long list of benefits and here are some of them:
- It improves your credit score or CIBIL records immensely and helps you get future loans at favorable terms.
- Your savings or newly earned finance can be put to good use.
- You will be free of debt and continue life without the tension of repaying the monthly installments.
- You will save by pre-closing your loan as you would not be required to pay interest for the remaining period.
- You can utilize the money saved in making profitable investments.
What are the disadvantages of pre-closing a loan?
Though there aren’t many disadvantages, some may be listed as below:
- If you are availing tax benefits by paying interest, then pre-closing a loan will strip you off such benefits.
- If your savings could be used in a more profitable venture than pre-closing it, then it will be a loss.
To sum up, every financial institution may have its own rules when it comes to loan pre-closure. Ensure that you know the terms well before taking a loan to avoid hassles later.