When you take a personal loan, you opt for the one that best suits your needs. Over time, your financial situations might change and you may want to repay your loan earlier and be free from debts. You should know that if you pay off a personal loan before the fixed tenure, you can incur a hefty early repayment fee. Most banks and financial institutions charge this fee to borrowers for early redemption of the loan.
What is an Early Repayment Penalty?
Early repayment charges, also known as prepay fees or exit fees, are extra costs charged by a bank to the borrower if he/she chooses to pay off the loan before the end of the tenure. Banks charge early redemption fees to recoup the interest amount you would have paid had you repaid your loan over the predetermined term.
How Does It Work
Banks charge an early repayment fee of 1% to 5% or up to S$250 of the outstanding balance, whichever is higher. You will incur this charge if you decide to pay off the outstanding in full within your lock-in period. Before you pay off the loan amount, you must notify the bank in writing at least one month prior to the final payment date.
Suppose you have taken a personal loan of S$18,000 and you have paid S$8,000 of the principal amount, with S$10,000 remaining. The lock-in penalty would be 5% of S$10,000 or up to S$250, whichever is higher. In this case, S$500 is what you have to pay as an early repayment fee.
Tips to Avoid Such Penalties
- Continue to pay your monthly instalments: This is the most basic way to avoid early payment penalty. If you pay you monthly instalments on time, then you will gradually finish paying the loan without any penalties or hidden costs.
- Choose a short tenure: Choosing a short tenure means you may not have to pre-close your loan and thereby, incur this penalty in the first place. However, shorter tenure will require paying higher monthly instalments. So, make sure you can afford the loan at such tenures.
- Choose a personal line of credit line instead: Instead of a personal loan with fixed instalments, you can opt for a loan against your credit card wherein you have the option of flexible payment options. Here, you can repay any amount per month (subject to a minimum payment) and complete full payment at any point without incurring any additional charges.
Here are a few tips on how to accommodate the early repayment charges in case the options above are not viable for you:
- Save money: Find an app or a way to stash away a certain portion of your salary so that you can use that savings to pay your monthly instalments. This is definitely a convenient way to pay off your loan faster without feeling the pinch of the early repayment fee.
- Read the fine print: Banks will not advertise such charges upfront. Hence, it is important for you to know about the extra costs you may incur. Read the terms and conditions section of your personal loan. This will help you to plan a budget for the entire month.
- Use surplus money: If you get a bonus or a raise, you can use the surplus amount to pay your monthly instalments. This method is will help cover the cost of the early repayment penalty.
Before applying for any loan, familiarise yourself with the terms and conditions of the loan including all the additional fees you may be charged during your tenure such as late payment fees, additional interest charges, early repayment fee and so on. This will help you plan your monthly budget and schedule your repayments in an effective manner.