Because of the stress caused by monthly EMIs and the high-interest costs associated with personal loans, many people are considering prepaying their existing personal loans. This is because these factors combine to make each month challenge.
Even though prepayment of personal loans seems a nice thought, you, as a borrower, should still carry out a cost-benefit analysis before prepaying it. This will ensure that the decision benefits your financial health.
So, the following tips will aid you in making an informed decision on the prepayment of an existing loan, especially if you are thinking of going for a new ICICI personal loan apply.
The advantages of paying off a personal loan prematurely.
Helps to bring down the total amount of interest cost
When trying to decide whether or not to prepay your Personal Loan, the amount of interest you would save is the single most significant consideration to take into account. There is no point in prepaying if you are not able to reduce the amount of interest you pay by a significant amount.
On the other hand, a sizeable portion of borrowers holds the mistaken view that reductions in interest expense can only be accomplished through ICICI Personal Loan Preclosure made during the earlier stages of the loan’s duration and not during the later phases of the loan’s lifespan. This is an incorrect assumption.
The point of the issue is that even in later years, there is still the possibility of economizing through the accumulation of interest. You can determine the amount of money you will save on interest by prepaying your personal loan by using a personal loan prepayment calculator that is available online.
Just like you can check the status of your application after going for ICICI personal loan apply online, this tool can help to check expected estimated savings through prepayment. However, you should carefully examine the prepayment fees as well as any other additional charges that may be imposed, and you should only move forward with the prepayment if it would result in savings for the entire transaction.
Reduces the amount of monthly EMI in relation to income
Lenders offer preference to loan applicants whose total EMIs, which include payments on any existing loans as well as payments on any new loans, are between fifty and sixty percent of their monthly income. This includes payments on any new loans as well as payments on any existing loans.
Therefore, existing borrowers of personal loans who intend to apply for another loan can do ICICI Personal Loan Preclosure of their current personal loans to ensure the EMI to income proportion lies below 60 percent. Doing so will increase the likelihood that they will be approved for the new loan when they go for ICICI personal loan apply.
Reduces the percentage of the total credit mix that is comprised of unsecured loans.
“Credit mix” is a term that refers to the proportion of an individual’s secured and unsecured lending facilities that are secured and unsecured. When assessing an individual’s credit score, credit bureaus look at the individual’s overall credit mix as well as individual credit accounts.
Credit bureaus have a propensity to award higher credit scores to borrowers who have a greater concentration of secured loans, such as housing loans, vehicle loans, and loans secured against property.
This is because credit bureaus view secured loans as more reliable than unsecured loans. This is due to the fact that financial institutions prefer to extend credit to individuals who have a greater number of secured loans in their overall portfolio of loans.
Because of the nature of personal loans, making early payments on a personal loan will result in a lower proportion of unsecured loans within your overall loan portfolio. Your credit score will benefit as a direct consequence of this action’s positive ripple impact, which will be helpful when you next time think of an ICICI personal loan application.
Disadvantages Associated with ICICI Personal Loan Preclosure
Costs Associated with the Prepayment of a Personal Loan
It is now against the law for lenders in India to charge prepayment fees for loans that have variable or floating interest rates, as this practice has been deemed illegal by the Reserve Bank of India. If, on the other hand, the loan was obtained at a fixed interest rate, the lender is free to impose whatever prepayment fees they see fit in the event that the borrower pays off the loan early.
As a direct consequence of this, the vast majority of financial institutions impose prepayment penalties that are equal to an amount that falls anywhere between 1 and 5 percent of the total amount that is still outstanding on the loan. In addition, the vast majority of financial institutions do not enable borrowers to make a partial payback on a Personal Loan prior to the completion of the repayment of a predetermined number of EMIs.
Adverse impact on liquidity
When you go for ICICI personal loan apply, you must be aware of the high cost of interest on personal loans, right? This high-interest cost is exactly what compels many borrowers to repay the loans at the soonest by taking money out of savings accounts or selling investments that were bought with the intention of assisting them in achieving significant financial objectives.
But before you do so, ensure that your financial liquidity doesn’t get impacted, and you have sufficient emergency funds, investments, etc., and can repay your existing debts comfortably even after prepaying the loan.
Therefore, having a comprehensive understanding of these points makes it abundantly clear that ICICI Personal Loan Preclosure is, in fact, a beneficial step; however, this can only be the case if you carry out the cost-benefit analysis in the appropriate manner to guarantee that you will end up with a high degree of savings in interest cost.
If you don’t pay attention to the issues that were mentioned above, there is a good chance that you will wind up making poor choices and won’t be able to take advantage of the prepayment option to its fullest potential. Before making such a significant choice, keep in mind the importance of having complete comprehension of all the relevant particulars.