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Prepaying a Home Loan – Good Idea or Bad?

Prepaying a Home Loan – Good Idea or Bad?

However favourable your home loan interest rates or terms are, paying EMIs will always be a hassle. That’s why many people prefer foreclosing their loans to save on interest. After all, you no longer have the stress of debt weighing you down.

But have you ever considered the downsides of early repayment? Well, it may come as a surprise, but prepaying home loan does come have many shortcomings. Let’s understand the pros and cons in detail

Pro #1: You go debt-free

As mentioned earlier, repaying your loan before the end of tenure allows you to go debt-free. Not only does this take a huge load off your finances, but it also offers you peace of mind. By doing so, you can also think about your financial goals in a less constrained manner. Lastly, with the debt off your name, you can now also take up other forms of credit without burdening your budget too much.

Additional Read: Dos and Don’ts for a Home Loan Prepayment

Con #1: You hurt your credit score

It may shock you that repaying your entire loan amount before time doesn’t reflect positively on your credit rating. Why? Because credit rating agencies prioritize your debt management skills more than your punctuality. If you’re good at handling debt, it bodes well for your rating.

However, if you clear all the credit on your name by foreclosing, the agencies no longer have anything to judge your credit management skills. In a nutshell, credit agencies prefer active accounts more than closed accounts.

Pro #2: You save on interests

Though closing a loan does take a toll on your credit rating, the impact isn’t too drastic. Moreover, foreclosing saves you a considerable amount that would have instead been spent in servicing the interest. That said, the magnitude of your savings also depends upon how long you’re into the tenure.

If you’re foreclosing relatively early, you can save a ton. If you’re too late into the tenure, it’s best to hold off until the tenure is up. Why’s that? Because of prepayment charges.

Con #2: You’ll have to pay prepayment charges

Let’s face it; when you foreclose the loan to save on interests, it’s the lenders that are losing money. As a result, many loan providers charge a prepayment penalty. These usually range between 2.5% – 6% of the total loan amount.

So, even after prepaying the home loan, you end up saving nothing. In fact, if you foreclose too late into your tenure, you may also end up losing money. That’s why it’s best to check the foreclosure charges levied by a lender before taking a loan.

Additional Read: Home Loan Vs Personal Loan? Which One Should You Repay First?

Your turn

In the end, foreclosing your loan entirely depends upon your preferences. If you are looking to save money, make sure you prepay early into your tenure. If you just wish to go debt-free, prepayment, again, is the right option. However, if you’re too late into the tenure or don’t want to hurt your credit score, it’s better to repay it over your decided tenure.

With Tata Capital’s housing loans, you don’t have to ever think about foreclosing your loan. Why? Because our easy home loan eligibility, affordable rates, and excellent customer service make the loan borrowing experience completely seamless and hassle-free.

Start planning today with our home loan EMI calculator.

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