"Closing a personal loan early can save you money on interest and improve your credit score. To do this, review your loan agreement for any prepayment penalties, ensure you have enough funds to cover the remaining balance, and make the payment."
Published: 7 March 2025
Updated: 11 March 2025
Pre-closure is a common feature of personal loans across different banks in India. It enhances flexibility by allowing applicants to pay off the outstanding balance and close the loan account before the tenure. The decision of personal loan preclosure can have significant reasons on the borrowers’ end. The important factor to remember is that it is possible to close a loan early and that the process requires proper planning and involves certain charges for a smooth execution.
Outlined ahead is a comprehensive guide on how to close personal loan early. We will also be covering some major questions associated with a pre-closure, including deciding on the correct time and its benefits.
Once approved, a personal loan is generated to the borrower’s account against a contract that states the interest rate, tenure, and other important details. Borrowers are always encouraged to consider their financial obligations and carefully pick a repayment schedule that works best for them. However, a borrower might need to pay off the remaining balance and close the loan, which leads them towards the personal loan preclosure.
Before understanding how to close personal loan early, it is essential to know about the the options available:
Complete personal loan preclosure refers to paying off the remaining loan balance before the tenure ends. It can be a substantial amount that borrowers need to consider. With complete prepayment,
It happens that borrowers come across funds and want to pay more than the scheduled amount. Such partial payments are allowed and can be beneficial, as well.
While the bank allows such a transaction, it stands to withstand monetary loss due to early repayment. The bank then charges a percentage of the remaining balance to offset the loss. This personal loan preclosure charge varies based on banks.
Suppose you opted for a personal loan of INR 10 lakh at an interest rate of 11% with a tenure of 48 months. That would make your total repayable amount INR 12,40,585, and the EMI will stand at INR 25,846. You have paid your EMIs for 24 months, and you want to prepay the loan and close the account.
The outstanding amount after 24 EMIs (in 24 months) will be INR 6,20,281. Add a processing fee of 2% to that, which is (2/100) * 6,20,281 = INR 12,406.
So, at the end of the loan closure process, you will be paying:
Outstanding amount + processing fee = 6,20,281 + 12,406 = INR 6,32,687
The process of how to close personal loan early varies from one bank to another; the basic criteria and steps, however, remain the same:
The answer to how to close personal loan fast lies in proper planning. Know what documents you need to provide and other requirements you must fulfil well before you initiate the prepayment.
Prepaying a personal loan before the term is over can prove to be a smart financial decision as long as you weigh the pros and cons wisely. Although prepayment penalties apply, the long-term benefits of early loan repayment make a convincing case. Here are the major advantages of prepaying a personal loan:
Personal loans can have significant interest rates; the longer the tenure, the more interest to be paid. Paying off the outstanding amount ahead of schedule minimises the overall interest outflow, which translates into significant savings. Even if a lender charges prepayment fees, the overall savings on interest usually makes it worthwhile to repay early. The saving on interest and, therefore reduced overall cost is the prime benefit of personal loan preclosure.
Being debt-free comes with a feeling of financial freedom and flexibility. The hovering EMIs can consume a large part of your income, leaving you with little to save, invest, or spend on other things. By prepaying your loan, you free funds in the longer term that can be utilised for wealth-building activities, rainy-day savings, or other expenses. This higher liquidity enables you to plan for the future more confidently.
Early repayment and closure of the loan can help improve your credit score. Having less debt increases your credit utilisation ratio and shows you are financially disciplined. This makes you a more desirable borrower for lenders in future loans. Additionally, it lowers your liabilities and can increase your debt-to-income ratio, which is a significant factor in your creditworthiness. This can be especially useful when applying for a new loan or other long-term financial obligations.
Determine if the personal loan early payoff is the best financial move by deliberating on the following factors:
Sufficient funds do not only refer to funds required to pay off the remaining balance; you must have enough funds to fulfil your financial obligations after prepaying the loan. This way, you will not fall into monetary constraints.
Experts always recommend paying off the debt with the highest interest accumulation; it reduces your overall financial responsibility faster. If the loan you are considering paying off is the one with the highest interest rate, you will benefit from the decision.
There is often a lock-in period during which no prepayment can be made. Some banks may permit personal loan preclosure before 12 month, while others do not. Borrowers must adhere to the lender policies; besides, here are two instances when it is best not to opt for a pre-closure:
Paying off the personal loan sooner rather than later in the tenure will allow you to save more. If you have only a few months of EMIs left and at this point, the pre-closure charge becomes higher in comparison to the money you stand to save, pre-closure will do more harm to your finances. Use a personal loan foreclosure calculator to get exact calculations.
Pre-closure does have a positive impact on the credit history, but sticking to the regular EMI schedule can have a more long-term impact on your credit score. As you pay timely EMI, it will show a disciplined borrowing habit. Avoiding to pre-close a loan is best when you want to consistently boost your credit score.
Paying off loans can be a smart move, but there are ways to put your additional funds to better use. Below mentioned are some alternatives to early loan repayment:
My Mudra brings you a comprehensive platform where you get access to information about all your credit options, compare and select the best fit. Features like pre-closure make borrowing more flexible and enable borrowers to benefit from profitable situations. On our platform, stay updated with the features, and associated updates so that you can make the most out of the options available to you.
Yes, most lenders allow you to close your personal loan early. However, prepayment charges and terms vary based on the lender’s policies.
Yes, many banks and NBFCs charge a foreclosure fee, usually ranging from 2% to 5% of the outstanding loan amount. Check with your lender for exact charges.
Without a loan closure certificate or NOC, your loan may still appear active in the lender’s records, which could affect your credit report. Always collect it after closing the loan.
Closing your loan early saves on interest payments, but you should evaluate prepayment charges and ensure it doesn’t impact your financial liquidity before proceeding.
