Several public and private sector banks have revised their home loan and personal loan interest rates, following the repo rate cut by the Reserve Bank of India (RBI) in the previous monetary policy review cycles.

The apex bank reduced the key lending rate by 25 bps each in February and April, bringing it down to the current 6%.

As the RBI is scheduled to hold its Monetary Policy Committee (MPC) meeting from June 4 to June 6, there are speculations of another rate cut. With a further rate cut, if announced by the RBI, the interest rates are expected to come down.

Mostly, banks revise the interest rates on home loans and personal loans with every repo rate cut to pass on the benefits to the customers, as they get the money from the RBI at a lower rate.

Amid the anticipation of interest rates easing further, many people could be evaluating the options whether it would be wise to prepay the existing loan.  

Early repayment of the loan is often a smart move, as it can lead to substantial savings on interest over the long run. However, various banks and financial institutions may levy prepayment fees, so it’s always advisable to look for any hidden charges or penalties before paying off the loan early.

Let’s take a look at the key detail about loan prepayment:

What Is Loan Prepayment?

When you take a loan, you are required to pay a fixed amount as Equated Monthly Instalment (EMI) over a pre-defined period. The EMIs also include the interest amount.

However, if you can make an extra payment in a given month, more than your regular EMI, then it will reduce your outstanding amount and lower your future EMIs. This will not only help in interest savings but will also shorten your loan tenure.

Will Loan Prepayment Be Rewarding?

The first and foremost advantage of prepaying a loan is the reduced interest amount. For example, you have taken a home loan of Rs 50 lakh at an interest rate of 7% over 20 years, so the total interest you will be paying will be approximately Rs 43 lakh. But if you prepay Rs 5 lakh after five years, then you can save around Rs 11 lakh in interest. So, the amount you have saved on interest can be used for investment and other financial planning.

In addition to this, your credit score will also improve as timely payments and early repayments will reflect a positive credit history. The higher the credit score, the easier it is to get loan approvals in the long run. Your credit score also plays a crucial role if you want to apply for future credit cards. 

Generally, the interest amount on a home loan or a personal loan increases with a longer repayment period. If you opt for a longer tenure, the EMIs will go down, but the payment for the interest portion will be higher. Prepaying a loan will reduce your overall debt burden as you won’t pay the interest for the remaining period.

It’s important to note that you can only get the benefit of any reduction in the interest rate by banks on your existing loans in case of floating interest rates. The reduced interest rates will be applicable for an existing loan when you opt for a floating interest rate. Any revision in the interest rate won’t be helpful if you have a loan with a fixed interest rate.

It’s advisable to evaluate your financial goals and overall debt burden before deciding to prepay any existing loan. 

. Read more on Personal Finance by NDTV Profit.Mostly, banks revise the interest rates on home loans and personal loans with every repo rate cut to pass on the benefits to the customers, as they get the money from the RBI at a lower rate.  Read MorePersonal Finance 

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