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- August 7, 2024
Can I pay EMI in Advance? Know How to Close a Loan Early & Its Benefits
August 7, 2024
August 7, 2024
Who would have thought that loans and EMI purchases would become such essential parts of personal finance management? Almost everyone knows what an EMI is. In simple words, an EMI (Equated Monthly Installment) is a fixed payment made by a borrower to a lender at a specified date each month. EMIs are used to pay off both interest and principal each month. Following this, over a specified number of years, the loan is paid off in full. Whether it’s for purchasing a home, car, or even a high-end gadget, EMIs make large expenses more manageable.
However, many borrowers often wonder whether they can pay EMI in advance or not. Today, we’ll shed some light on the same and the benefits of closing a loan early.
The concept of EMI has grown to a great extent over the past few decades. This is fueled by increasing consumer demand for expensive goods and easy access to credit. Financial institutions and banks offer various EMI schemes with attractive interest rates and flexible repayment terms. The rise of digital platforms has further simplified the process and has allowed consumers to apply for online personal loans instantly. This accessibility has benefited specific segments. For example, people looking for small personal loans or loans for women and so on.
To put it straight, the growth of EMI has enabled financial independence and improved living standards.
While both prepayment and advance payment involve paying extra money towards your loan, they are not the same. In simple language, prepayment refers to paying off the entire loan amount before the end of the loan tenure. This is often done in one or multiple large sums that reduce the outstanding principal amount to a great deal.
On the other hand, advance payment involves paying future EMIs in advance without changing the loan tenure. Understanding this distinction is quite important for borrowers to make the right decisions about their loan management.
Paying your EMI in advance can be a straightforward process if you follow these steps:
1. Review Loan Agreement
Always check your loan agreement to understand the terms and conditions related to advance payments. Look for any clauses about penalties, charges, or restrictions on advance payments
2. Contact Your Lender
You can reach out to your lender to confirm if advance payments are allowed. If yes, get detailed instructions on how to proceed. Some lenders may require you to submit a formal request or complete certain formalities.
3. Calculate the Amount
Determine the amount you wish to pay in advance. This could be one or more EMIs, depending on your financial situation and the lender’s policies.
4. Make the Payment
Follow the lender’s payment process. This could involve online transfers, cheque payments, or other methods as specified by the lender.
5. Get Confirmation
After making the payment, don’t forget to get confirmation from the lender that your advance payment has been received.
There are several benefits of early loan repayment. The top ones include:
1. Interest Savings
One of the prime benefits of early loan repayment is the savings on interest. By reducing the principal amount faster, you reduce the total interest payable over the loan tenure.
2. Improved Credit Score
Paying off a loan early can impact your credit score in a positive way, without a doubt. This makes it easier for you to get instant personal loans in the future.
3. Financial Freedom
Eliminating debt sooner than expected provides financial freedom and reduces the mental stress linked with long-term debt.
4. Increased Savings
With no more EMIs to pay, you can use the funds for savings or investments. Again, this is one of the best prepaying EMI benefits.
5. Eligibility for Future Loans
As we said earlier, early loan closure can improve your creditworthiness. This makes you eligible for better loan terms and conditions in the future.
1. Prepayment Penalties:
Some lenders impose penalties for prepaying loans. Make sure you understand these charges and calculate if the interest savings outweigh the penalties.
2. Financial Stability:
Ensure that making an advance payment does not strain your financial situation. It’s essential to maintain adequate liquidity for emergencies and other financial needs.
3. Investment Opportunities:
Evaluate whether the funds used for advance payment could bring better returns if invested elsewhere. Sometimes, it might be more beneficial to invest the money rather than paying off the loan early.
4. Loan Terms:
Never forget to review the terms of your loan agreement to understand the impact of advance payments on your loan tenure.
Paying EMIs in advance or closing a loan early can offer numerous benefits. Some of these include substantial interest savings, improved credit scores, and greater financial freedom.
However, there are a set of things you should consider before making advance payments. By examining these factors, you can make an informed decision that aligns with your financial goals.
1. How does paying EMIs in advance affect my loan tenure?
Paying EMIs in advance can reduce the principal amount faster, which in turn can lower the total interest payable. Depending on the lender’s policies, this may also shorten the loan tenure.
2. Is it better to pay off a loan early or invest the money elsewhere?
The decision depends on various factors, including the interest rate on your loan, potential investment returns, and your financial goals. If the loan interest rate is higher than potential investment returns, paying off the loan early might be more beneficial.
3. Are there any penalties for paying off a loan early?
Some lenders may impose prepayment penalties for early loan closure. It’s essential to review your loan agreement and consult with your lender to understand those things.
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