Tip Tuesdays: When’s a Good Time to Pre-close a Personal Loan?

by Vinaya HS on January 5, 2010

in Finance

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That depends on where you are right now into the tenure of your loan, but the general answer is “as early as possible into the tenure of the loan.”

EMIs for personal loans — or any loan in general — are structured such that the interest component of the EMI forms a significant portion of the EMI early into the tenure of the loan. For example: in the first EMI for a personal loan of INR 300,000 at 18% over 36-months, the interest component constitutes nearly 41.50% of the EMI amount! At the end of 12- and 24-months, the figures are 31% and 17.60% respectively.

For this loan, at the end of 12-months, you’ve already paid 52.40% of the total interest payable (if the loan were to be serviced over its full tenure). Since there’s a significant amount of the interest yet to be paid, it would make financial sense to pre-close the loan at this point (even after including the pre-closure penalty).

However, at the end of 24-months, you’ve already paid 86.90% of the total interest payable. It would therefore make little sense to close the loan at this point — you have no significant financial advantage in doing so.

Look at these factors when you’re thinking of pre-closing your personal loan and decide appropriately. You might find this Personal Loan EMI Calculator handy.

Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 4 comments… read them below or add one }

Sudhir March 16, 2011 at 7:25 PM

Hello Vinay,
Thanks for your advice. I have taken home loan for 18,70,000 from SBI for 15 years tenure @ 10.75% interest pa . I started paying EMI from Jan 2008, . I am planning to preclose my loan before Dec 2012. Is it good idea to preclose within half of the tenure?? Please advice.

How do i calculate whether it is loss or gain for me if i go for preclosure in 6 or 7 years.

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