Pre-payment of loan takes place when a borrower chooses to reduce the borrowed principle by making a lump sum capital repayment. Suppose you take a house loan of Rs.24 lakh. After two years the borrower gets some gains from stock market, say for Rs.5 lakh. The borrower can contact the bank and make a lump sum capital repayment to reduce the outstanding loan. The benefit of making a pre-payment is that borrower will get rid of debt soon and the EMI will be reduced over the life of the loan.
Certain banks charge fee if you make pre-payments. So you better consult with your bank if any of those clauses is applicable.
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