If you’re in two minds when it comes to prepaying your Personal Loan, we’re here to shed some light on whether or not prepayment is a wise idea.
When you’re strapped for cash to fulfil financial commitments a Personal Loan is the best solution to keep you anchored during cash crunches.
Like a friend in disguise, a Personal Loan ensures that you can handle your unexpected needs without disrupting your budget. In addition, benefits such as the flexibility of being a multipurpose solution make it a perfect cover for rainy days!
Loan prepayment is when a borrower chooses to pay off the loan entirely even before the completion of the loan tenure. In the event that you have surplus cash in hand, you may choose to pay off your loan in advance instead of waiting till the end of the tenure.
Additional Reading: Should you prepay your personal loan before other loans?
Prepayment of your Personal Loan will imply that you gain considerable savings in terms of the interest that you would otherwise pay. However, the important question is whether prepaying your loan is a good idea? While prepaying may bring you peace of mind, it may not be the most financially advantageous option.
Confused about when to prepay your loan? We’re here to tell you everything about your Personal Loan Prepayment.
Consider the interest rate on your loans
Usually, different loans come with different interest rates. If you have multiple loans, prepaying the one with the highest interest is sure to make a notable difference.
Is the debt-monster lurking in the corner giving you sleepless nights? If you have multiple debts to clear, the easiest way to get out of it as soon as possible is to pay off the debt with the highest interest component. This method is called the avalanche method of debt repayment.
If your Personal Loan ranks at the top of all your debts, you should definitely opt to prepay it.
Additional Reading: Home loan prepayment – When and why?
Setting up a retirement fund
The first thing to do is to weigh and see if the money that you owe today will reduce the sum that is available to you for future use.
Saving for your retirement is a highly necessary step in financial planning. When you’re saving for your old age requirements, the earlier you start, the better it is. Starting earlier allows you to save over a longer period of time.
Setting up a retirement fund while at the same time paying off your loans is an exercise in defeat. Rather, it is better that you emerge debt-free first. After your loan is repaid, you can set aside money and also boost your investment portfolio.
If you’re considering paying off your Personal Loans early so that you can start saving for your retirement as early as possible, go ahead!
Additional Reading: Prepare a prepayment hierarchy!
What to keep in mind before prepaying your loan?
The interest you are expected to pay in the process of repaying the loan is a way for the bank to earn a profit. Personal Loan repayment equated monthly instalments (EMIs) are decided in a way in which the bank keeps receiving the interest throughout the loan tenure.
So, in case you decide to prepay your loan, the interest that the bank would otherwise earn will decrease. Therefore, banks charge prepayment fees to make up for the loss of potential income. Before you pay off your loan, make sure to check if your lending bank levies a penalty for loan prepayment. Calculate your penalty fee and compare it to the savings that you’d otherwise earn.
Additional Reading: What you should know about prepayment penalty!
Another pointer that you must bear in mind is the lock-in-period. Usually, for most loans there is a minimum lock-in period during which you can’t pay off the loan amount.
Scrutinize the terms in your loan agreement and calculate the amount you’ll pay as foreclosure fee as well as the amount you will end up saving if you pay off your loan throughout the tenure. If you’re keen on paying off your debts early, prepaying your Personal Loan is a commendable move. However, remember that it might not always be the most financially sound solution.
Additional Reading: Conditions To Prepay Your Car Loan
Make sure that you do the maths beforehand. Also, it would be wise on your part to read the terms and conditions of the loan agreement carefully before talking to your lender regarding prepayment.
Are you in urgent need of cash? Why not take a tour of our website and check out the range of low-interest Personal Loans? What’s even better is that you may be eligible for zero-processing fee Personal Loans with approval in just 24 hours!