Imagine you’ve been saving money to buy a new phone for months. Suddenly, you find it on sale, and you have the money to buy it right away. Instead of waiting until the end of the month, you decide to pay in full now to take advantage of the deal. This scenario is similar to pre-closing a loan, where borrowers pay off their loans before the term ends.
Pre-closure charges, also known as early repayment fees, are imposed by lenders when borrowers opt to pay off their personal loans early. These charges serve as a way for banks to recover some of the interest income they lose when a loan is paid off sooner than expected. On personal loans taken against credit cards, these fees can vary, affecting your overall savings from paying off the loan early.
While pre-closure charges may seem like a drawback, they can be beneficial for borrowers who wish to reduce their debt burden or save on interest payments. It’s important to look at the costs of early repayment to see if it really helps your finances.
What is a Pre-Closure Charge?
Pre-closure charges are penalties or fees that lenders impose on borrowers when they decide to pay off their loans before the tenure. These charges can vary from one lender to another and depend on the type of loan. Usually, pre-closure charges are a percentage of the remaining loan amount or a fixed fee set by the lender.
For example, if your remaining loan amount is ₹50,000 and the pre-closure fee is 3%, you will need to pay ₹1,500 as a penalty to close the loan early.
Why do Banks Charge Pre-Closure Fees?
Banks and credit card companies earn money through the interest you pay over the loan tenure. When you pre-close the loan, they lose out on some of the expected interest income. To make up for this loss, they charge a pre-closure fee.
These charges also act as a deterrent so that people do not frequently close loans early, affecting the bank’s earnings.
What is a Personal Loan on a Credit Card?
A personal loan on a credit card is a facility provided by banks and financial institutions where you can borrow money against your credit card limit or over and above it. These loans are helpful during emergencies like medical bills, education fees, home repairs, or sudden travel plans.
- Pre-approved: Offered to eligible credit cardholders without any paperwork.
- Quick disbursal: The loan amount is credited to your bank account within a few hours or days.
- No collateral required: You don’t need to provide any security.
- Fixed EMIs: You repay the loan in monthly installments with interest over a fixed tenure.
What is Pre-Closure on a Personal Loan?
Pre-closure means paying off your entire outstanding loan amount before the original loan tenure ends. For example, if you took a personal loan on your credit card for 24 months but you repay the whole amount in the 12th month, that’s called pre-closure or foreclosure.
People usually go for pre-closure when:
- They have extra funds, like a bonus or savings.
- They want to save on the remaining interest payments.
- They want to reduce their overall debt burden.
How Much are Pre-Closure Charges?
The pre-closure charges can vary from one bank to another. They are usually between 2% to 5% of the outstanding principal amount. Some banks may also have conditions like:
- Pre-closure is allowed only after you have paid at least 6 EMIs.
- You may need to inform the bank in advance before closing the loan.
- GST is applicable to the charges.
Here is an example for better understanding:
- Loan Amount: ₹1,00,000
- Tenure: 24 months
- EMIs Paid: 10
- Outstanding Principal: ₹60,000
- Pre-closure Charges: 3%
- Charges Payable: ₹1,800 + GST
So, to close the loan early, you will need to pay ₹60,000 + ₹1,800 + GST.
Negotiating Pre-Closure Fees
If you find yourself in a situation where you need to pay off a loan early, it’s worth attempting to negotiate these fees with your lender. Many banks and financial institutions are open to discussion, especially if you have a good repayment history. In some cases, they may waive the penalty altogether or offer a reduced fee.
Bottom Line
If you plan to pay off a personal loan on a credit card early, be aware of pre-closure charges. These fees can affect your overall savings, but they also give you the option to reduce your debt. Before deciding, it’s important to compare the fees for closing early with the money you could save on interest. If you have the means to pay off your loan early, don’t hesitate to explore your options. Remember, many lenders may be open to negotiation, especially if you have a good repayment history.