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What happens if I prepay my loan partially or in full?

Curious about EMIs

What happens if I prepay my loan partially or in full?

Prepaying a loan partially or in full can have various implications depending on the terms and conditions set by the lender and the type of loan you have. Here's what typically happens when you prepay a loan:

1. Reduction in Outstanding Principal: When you make a partial prepayment, the outstanding principal balance of your loan decreases. This means you owe less on the loan.

2. Interest Savings: By reducing the outstanding principal, you'll pay less interest over the remaining tenure of the loan. This can result in significant interest savings, especially for longterm loans.

3. Prepayment Charges: Some lenders may charge a prepayment penalty or fee for making early repayments. This varies from lender to lender and depends on the terms of your loan agreement. However, as of my last knowledge update in September 2021, the Reserve Bank of India (RBI) abolished prepayment penalties on floating rate loans for individuals, so check with your lender for specific details.

4. Adjustment of EMI: After a partial prepayment, your lender may offer you two options:
Reduced EMI: You can choose to reduce your Equated Monthly Installment (EMI) while keeping the loan tenure the same.
Reduced Tenure: Alternatively, you can keep your EMI the same and reduce the loan tenure. This option may result in faster loan repayment.

5. Full Prepayment: If you decide to prepay the entire outstanding loan amount (full prepayment), you will need to settle the loan in one lump sum. This will close the loan account, and you won't have any further EMIs.

6. Prepayment Charges for FixedRate Loans: For fixedrate loans, some lenders may still charge prepayment penalties. Check your loan agreement for details.

7. Informing the Lender: Before making a prepayment, it's crucial to inform your lender about your intention to prepay. They will provide you with the exact amount to be paid and any applicable charges.

8. Documentation: Ensure that you receive a prepayment statement or letter from your lender confirming the prepayment and the updated loan details.

Keep in mind that loan prepayment can be a beneficial financial strategy, as it reduces your overall interest costs and can help you become debtfree sooner. However, it's essential to review your loan agreement, discuss prepayment options with your lender, and consider your financial goals before deciding to prepay your loan.

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