Why Do Prepayment Penalties Exist on Instant Loan?

A loan is a liability, which is the main reason why we suffer a lot of stress and are financially confined. Not all are lucky at the same time because destiny favors only a few of them by offering a chance to pay off the loan amount much in advance and help them feel relieved. So, if you are one of the fortunate ones, who are clearing your instant loan in India every month, then, just wait, as there is a major pain point, that you might not be aware of loan prepayments.

What is a Prepayment Penalty?

A prepayment penalty is a fee that your lender charges if you pay off all or a part of your loan amount early. Your lender is required to disclose the prepayment penalties before closing the loan. This way, you can ensure that you are well-informed about the consequences that you may entail when you pay off the loan amount before the tenure.

How Does a Prepayment Penalty Work?

Prepayment penalties are traditionally put in place because they help compensate for the cost of the lost income by the lender. Provided with a choice, your lender would rather happily lend to you, only if you pay exactly on time, not prior, or later. So that your lender can generate maximum income from the interest.

Once you have paid off the loan amount, your lender may calculate the penalty of the principal of the loan on how much interest is remaining. This fee could be a fixed amount that was decided when you have signed the loan agreement.

How to Calculate Prepayment Penalties?

Penalties can be calculated in various ways and mostly depends on the kind of loan taken. Here is how the penalties are calculated:

a). Interest costs – In this case, your lender will apply the prepayment penalty on the total interest paid by you, by the end of the term.

b). Percentage of balance – Sometimes, a certain percentage of the amount that is left on your loan, is considered as your penalty fee.

c). Flat fee – Some lenders fix a certain amount as your prepayment penalty. So, regardless of how early you pay your loan, you are entitled to pay the fixed amount.

The Do’s and Don’ts of Prepayment Penalty Clause on Loans

Do’s

a). Study the policies of your lender, as this can help you to find a better lender who doesn’t charge any penalty at all.

b). Before signing the agreement, ensure that you have read all the points on the prepayment penalty clause and understood the exact terms related to it.

Don’ts

a). If you are already having a loan with a prepayment penalty, check whether you can refinance the amount. By doing so, you are saving a lot of money after the penalty is applied.
b). The next best thing is not to accept any loan with a penalty clause in it.

Conclusion

It is always advisable to trust top lenders like FlexSalary if you need an instant loan in India, as they do not impose any prepayment penalties on any of their loans. FlexSalary is one of the best options to apply for any kind of loan i.e. personal loan, travel loan, educational loan, marriage loan, etc. You don’t have to pay extra if you are financially responsible.

Originally posted 2020-11-26 00:44:26.