- July 4, 2020
- Posted by: Ganeshcbani
- Category: Blog
Pay Off Early Personal Loan
A personal loan is a valuable choice if you are in a fairly short period of urgent need of funds. While the interest rates can be fairly high (because no collateral is given for the loan), no limits are imposed on their end-use. Like a home loan or car loan that can only be used to buy property and a vehicle, there is no limit on whether to use the money on a personal loan. As a consequence, the required documentation is also simpler.
Personal loans are some of the most costly loans on the market with interest rates between 15 percent and 20 percent in general. Often you will be able to repay the loan in advance rather than wait until the end of the loan period. Any advance payment means substantial interest-cost savings because the rates are so high.
But is your loan a good idea before payment or not?
To pay beforehand or not beforehand—this is the issue
Prepayment shall be made when a creditor pays his loan in part or in full before the due date. Indians are historically reluctant to embrace debt – but that mindset is shifting rapidly. After taking a loan, many are willing to return it as soon as possible, if their finances permit it. Although paying the loan in advance may give mental calmness, it may not always be the most financially preferred alternative.
There are two considerations you need to take into consideration when determining whether your personal loan is forbidden:
When you pay your loan earlier than the due date, most banks levy a penalty charge. This penalty fee varies from bank to bank. It can be a flat fee or can be based on the remaining interest due. It is also very important to calculate your penalty fee and equate it with the savings you will earn when you continue to pay interest rates on your loan for the duration of your tenure.
Some banks charge no fee for paying a loan in advance. Banks will not charge the “floating-rate” loan foreclosure penalty either – but, since most personal loans are fixed-rate, this is not necessary.
Note that normally, you will not pay your loan for a fixed lock-in duration (typically one year). It is only after this time that you can take into account the costs and drawbacks to avoid your personal loan.
Calculate how much you pay for mortgage fees and how much you earn on the loan’s remaining interest payments. Speak to your lender if appropriate in order to get an accurate understanding of your interest cost if you want to foreclose your loan with the other terms and conditions.
Savings on Principal Amount
Ideally, early prepaid payment of your loan saves you the most money. In the most part, though, this will only be true later in the loan period. Many borrowers who have already paid many EMIs feel that the interest on the remaining EMIs is small and it makes no sense to close the loan as they do not save much in terms of the remaining interest cost. Nevertheless, note that the interest charged on the unpaid principal is the same, as banks measure interest based on the method of balance reduction. In this situation, you will take the interest rate paid instead of only determining whether to foreclose your loan on the basis of the remaining loan term.
Alternatively, you can either pre-pay a portion of the loan or pay only part of the loan. This reduces the unpayable principal amount, reducing your EMI ‘s interest component. However, this option is only applicable if you pay a significant amount of your loan and do so fairly early in your loan term, or else the pre-payment penalty may be greater than saving interest.
It’s not always financially advantageous while trying to repay your debts. Make sure you make maths when paying your loan in advance. Read your loan agreement terms and conditions carefully and speak to your lender, if you have any questions about what you are liable to pay. All the considerations you need to weigh before making a final decision include the remaining loan term, the interest rate and the penalty fee.
How to determine if it’s worth?
Usually if the lender will not impose a pre-payment charge, you will benefit if the loan is repaid earlier. However if this provision is in place, some money will still be saved. Much of this depends on the interest fees and the amount of the loan you owe.
First of all, you must decide how much you save on early payment. This can be determined by adding the total interest on the remaining term plus any continuing payments. The final amount is what you can save if you actually want to refund your dues.
Subtract from the above sum the advance payment and other expenses. Pay attention to the form of fees paid – flat or percentage-based. The rest is what you earn by paying the loan early. A negative figure is more expensive than savings.
Fast compensation pros and cons
If you believe that you will pay off your loan early on, having a borrower that does not have a pre-payment clause makes sense. Yet we can not all be similarly foresighted. Because a tax is imposed, deferred payments can, depending on the form and outlook of the credit, be a good or bad decision. Take your choice. Take your pick.
- Less interest means more saved money
- Enhanced credit if you are debt-free
- Free money for anything you want – reinvestment, splurging, etc.
- Opportunity to receive a new loan that could offer a better rate
- Present charges can be avoided
- Interest on company loans may be deducted, and this deduction is lost
- You can risk a large sum by paying advance payments
The Bottom Line
An important consideration in obtaining a loan is the prepayment charge. Although it may not be on everyone’s radar to close early credits, you never know what can happen in the future. Putting all these considerations into account. Only opting to clear your debt at an early stage might be enough to give you peace of mind.