By paying off your personal loan early, you can save a good amount of money that you would have to shell out as interest payout. Paying off personal loans faster will leave you with more funds for investments and emergency funds. Also, if you wish to take another loan, then paying your current loan before the tenure ends, is sensible. Repaying a loan before time will lower your debt-to-income ratio, qualifying you for a better term and interest rate on a new loan.
However, some banks and NBFCs charge high prepayment penalties, making early payoff on debts, an expensive affair. So when you compare personal loan offers, choose the one with none or lowest prepayment penalty.
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Tips to consider for early personal loan repayment
1. Cut down on Monthly Expenses:
After taking a new loan, your intention must be to pay it off sooner and reduce the interest payout burden. One way to achieve this is to cut down on your monthly expenses. Avoid making purchases you can do without, preferably avoid eating out at expensive restaurants but choose home food, stick to a strict budget, adapt to sustainable and eco-friendly living and enjoy lower energy bills. Any amount you save by cutting down on monthly expenses should go towards early repayment of the debt.
2. Secondary Source of Income:
How about converting your hobbies into a secondary source of income? For instance, if you enjoy writing, you can freelance as a writer and earn a decent income over the one from your full-time job. If you have a spacious lawn, you can collaborate with event management companies to rent this space for parties and celebrations.
If you have items you no longer use, sell it off. Or, you can even take up a part-time job that is flexible on timings and suiting to your current work schedule. Thus, income from secondary sources can be compounded to pay a personal loan faster.
3. Debt Consolidation:
If you have too many ongoing loans, you can opt for a debt consolidation (paying multiple debts with one single loan). By consolidating debts including personal loans and other loans, your credit score will improve. It also reduces the chances of missing out on loan payments. You will have to make a single payment against multiple payments on your earlier loans. This method of repaying debts will also help to remember the EMI date than having to remember EMI dates of multiple loans.
But be careful when choosing a new loan for debt consolidation. The interest rate of the new loan must be lower than the combined rates of interest on your earlier loans so that you can save significantly, and even pay off personal loans and other loans quickly.
4. Make One Big Payment:
Most banks and NBFCs offer prepayment options without penalties after you have paid a certain number of EMIs. Many banks, for instance, allow prepayment without fees after initial 6 EMIs. You can use this opportunity to make a big payment for the loan and reduce repayment liability. For instance, the yearly bonus from your workplace or come a financial inheritance can be collectively used to make a lump-sum payment on the debt.
5. Save on with Discounts:
Before you sign the loan agreement, ask the lender if any available discounts. Banks and NBFCs may offer a discount on the APR (Annual Percentage Rate) if you enrol for autopay or prepared to make a lump-sum payment after a period. Look for discounts on processing fees and other charges. With added discounts, you can save a considerable amount on a personal loan payout.
When is it Wiser to avoid paying off a Personal Loan Early?
Paying off debt can indeed reduce your financial burden, but it may not be an ideal choice always. There are times when paying the debt through a selected tenure, is wiser and more beneficial than repaying it early. Below-given are scenarios when you must not pay off your debt faster.
• You Have Insufficient Credit History: If you are a new borrower with an insufficient credit history or a credit score that is considered not good enough, then a paying a debt through its existing tenure can be beneficial. By making regular monthly payments, your credit score and history will improve, fetching lower rates and better terms on new loans in the future.
Also, if you pay your personal loan quickly, the loan account will close in your credit report. Closing a loan account reduces diversity in the credit portfolio. It also diminishes your payment history and hurts the credit score even if you are saving money on interest payment. But, you have to close a loan account someday, be it paying the loan as per decided tenure or early.
So it is suggested that you must consider which loan accounts are open and close the ones that incur the highest interest cost. Make sure to keep a healthy mix of open loan accounts to maintain a good payment history.
High Early Prepayment Penalty:
Some lenders charger a higher repayment penalty than others. Calculate the prepayment penalty vs. interest amount you can save. If the repayment penalty is higher than the interest amount saved, then you should not pay the debt quickly. Also, when you take out a new loan, make sure to check the prepayment penalty applicable.
Increase Your Savings:
If the monthly EMIs are affordable, then rather than paying a personal loan early, you can add surplus money into your savings account or invest the amount somewhere else to grow money. This way, you can earn interest on savings and investments, helping to avoid the need to take a new loan later.
To Conclude
Repaying a personal loan early is a decision that you must take only after weighing several aspects – part-payment or prepayment penalty, interest amount saved by paying the loan early, other charges, your credit history, and score, etc. By following the above-given tips you will be able to take an informed and right decision about your personal loan repayment.
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I’m Jimish Shah, the person who started SkyZ Infotech, a Powerful and Result-Driven Most Reliable Digital Partner. I’m a professional blogger, digital marketer, and content marketer also with over 8 years of experience. My focus is on providing the most researched information to new startups, entrepreneurs, freelancers, and bloggers. My objective is to educate the youth of today on a broad range of subjects.
