There are moments when you might find yourself with some extra cash, and path to clearing your loan early does seem very relieving, but many are not aware that there are still penalty charges you may need to pay if you have chosen the standard loan service. A flexi loan is an option which you can also apply for if you are sure of paying your personal loan off early.
Why Does Prepayment Reduce Interest Burden of a Personal Loan?
Personal loans are calculated using the reducing balance method, with interest applied each month only to the outstanding principal balance, not the original loan amount.
When you make a prepayment, the lump sum goes directly toward the outstanding principal. Because the main debt is reduced immediately, the lender must then calculate all future monthly interest based on this new, smaller amount. As a result, future interest charges drop significantly, and the total amount of money you end up paying back over the term of the loan is greatly reduced.
But The Penalty Is Charged
While prepaying saves money, fintech apps protect their profit margins by charging fees if you clear your debt before your tenure window ends.
- Prepayment Penalties: Most digital personal loan apps charge a foreclosure or part-payment fee ranging from 2% to 4% on the principal amount you are clearing.
- Lock-in Windows: Apps often enforce a strict waiting period. You are typically barred from making any extra payments until you have completed your first 3 to 6 regular monthly EMIs.
What To Know When Choosing Between Paying Off Your EMI or Shortening Tenure?
If you make a partial prepayment, standard loan applications will ask how you want to restructure the remaining debt. You have two separate options:
Shorten Your Tenure (Max Savings):
- You will keep your monthly EMI unchanged. The extra amount you pay will reduce the number of months or years remaining on your loan.
- Since you clear the debt sooner, this option offers the greatest interest savings and suits people with steady incomes who want to get out of debt as quickly as possible.
Lowering your EMI (for improved cash flow):
- You keep the same loan end date, but your monthly payment is reduced.
- While this option doesn’t save as much in total interest as reducing the loan tenure, it gives you immediate relief in your monthly budget by freeing up cash each month.
What To Pick Between Standard Loan Vs Flexi Loans?
How you execute a prepayment depends heavily on the type of loan app you use:
Standard App Loans:
- Traditional fixed-term digital credit still allow prepayment, but the process is more manual. You must navigate to a specific part-payment or foreclose tab in the app dashboard.
- If you just transfer extra money normally, the app might mistake your cash for an advance payment for next month’s regular EMI rather than slashing your principal.
Flexi Loans:
- This service is offered by many online lending platforms; these function like an active credit limit or overdraft facility.
- If you want to pay your credit amount early, you can do so without extra charges or penalty fees.
Pro Tip: Before you click pay in your loan app, work out how much you will actually save. Early repayment is only a mathematically sound option if the total interest you will save over the remaining term is greater than the prepayment penalty fee charged by the app.
Summary
Before you apply for a loan, there are often some ways you can go about it. Either you can choose a flexi loan option, or choose a shorter tenure if you are confident that you will be able to pay the amount early; there is still flexibility to pay for your loan early, but a penalty fee will be applied.
If you are looking to apply for a personal loan, whether it is fixed or flexi, Bajaj Finserv App offers the right services, while offering credit of up to ₹55 lakh across India.
