A personal loan is a popular way to borrow money in case of a cash crunch. This is mainly because of its key feature of flexibility. This means you can choose tenure, repayment, and use according to your needs. The other good feature of this loan is that you don't need to use any assets as collateral. 

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Before applying for a personal loan, you should ask yourself why you need a loan. Once you take a loan and start repaying your EMIs, you should maintain regularity to avoid any penalties.

However, if you get surplus money during the repayment, you can consider prepaying your loan.

Prepaying a loan is a smart strategy to save significant time and money in the form of interest on the principal amount. 

Here are a few things that a loan borrower should keep in mind before prepaying their personal loan.

What happens when you prepay a loan?

When you prepay your loan, the overall EMI is reduced, allowing you to pay a lesser interest rate on the outstanding balance. Your credit score improves, and you can save money.

Does it impact your credit score?
No, there will be no negative influence on your credit score; rather, it may improve your credit score.
 
Foreclosing fee
Different banks charge different foreclosing fees. It is better to check with your bank before making the decision. The purpose is to save you time and money. 
 
Will it save interest?
When interest accumulates over time, it can compound to a substantial sum. Prepayments help reduce this buildup. Taking off the debt, either partially or totally, will save you from incurring further interest over time.
 
Speak to your loan agent
Contact your lender and discuss your intentions to prepay your debt. It is way better to discuss and get clarity in case of any doubt before starting the process of prepayment.
 
Devanand Chaudhary, chief sales officer, Niyogin Fintech Limited, advises when you should prepay your personal loan.

"Foreclosure lock-in and charges are important aspects when one applies for a personal loan," says Chaudhary. The minimum lock-in period varies from 1 month to 12 months, and foreclosure charges vary from 0 per cent to 4 per cent, he said.

Chaudhary further says that the second thing that needs to be checked is the repayment schedule. This can be understood before disbursement, and after disbursement, loan lenders will mandatorily send this information. Typically, 35-50 per cent of the total loan tenure is heavy on the interest amount and low on the principal amount. If one has already paid EMI for more than 35-50 per cent of the total loan term, then one can take a call not to foreclose and use liquidity in an alternate investment. If it is within 35-50 per cent of the loan tenure, then after checking the foreclosure charges, a decision can be taken to prepay.
 
"For big corporate house employees and big-ticket loan amounts, these features may include a one-month lock-in period and no charges for early repayment. People thinking of foreclosing a loan at any time should opt for the PLOD (personal loan overdraft) product offered by a few lenders. Typically, the credit limit is assigned, and one can withdraw the desired amount and pay only monthly interest and principal as per liquidity (any amount). The principal amount can be 0 for the first 12 to 24 months, depending on the lender. Interest is calculated daily. It means individuals can repay the principal amount as soon as they have liquidity, and they won't incur interest charges for the entire month, with no penalties for early repayment. In OD, product foreclosure is charged when one wants to close the account, and charges are typically non-negotiable," added Chaudhary.