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Looking for a personal loan? Beware of prepayment provisions

It’s very important to study the bank prepayment provisions, primarily prepayment fees, before finalizing the loan.

June 29, 2015 8:24 IST | India Infoline News Service
People generally don’t take the exceptionally high-interest personal loans except in emergencies. Given that personal loans don’t add up to the borrower’s wealth, people prefer to prepay them as fast as possible, often immediately following the completion of the lock-in period. Hence, it’s very important to study the bank prepayment provisions, primarily prepayment fees, before finalizing the loan. Many borrowers focus on the loan interest rate but overlook prepayment provisions despite the fact that personal loan prepayment is very common due to different reasons including:
 
Interest burden: As the interest rates on personal loans are substantially high - in the range of 12% - 26% - borrowers tend to make prepayment their priority to bring to an end to the financial bleed from the steep interest rates.
 
Loan refinance: Given very little paperwork involved in personal loans compared to other loans, many people commonly refinance them by switching from the original bank to another bank offering lower interest rates.
 
Tax burden: Personal loans are not tax exempt unlike home loans, so there’s no motivation to hold the loan for long. In fact it’s just the reverse – to pay off the loan as fast as possible.
 
Improved finances: Often the borrower’s financial position gets better from salary increments, bonus receipts or profit from business, so prepayment in such cases only becomes logical. 

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