Having a personal loan is a major liability that continues to hang over the borrower’s head until paid off. Paying a personal loan faster than the pre-decided period of time can be a great boost for borrowers since it can offer a number of benefits.
However, it is advisable for the borrowers to thoroughly assess their financial situation, and preferably have ample funds for 3-6 months before choosing to repay the loan early. But, it is important to know how to go about it, and we will explain that in this article.
Advantages of Paying Off a Personal Loan Fast
Before you choose to pay off your loan earlier than the contract term, it is essential to consider whether or not it would be a good option for you. In general, early payment can be quite beneficial. However, in some circumstances, it may not be the ideal choice for the borrower.
It is a good idea to pay off a personal loan early if you do not have any other liabilities to cater to. This is because by making early payments, you can save significantly on interest payments. This can minimize your debt load, improving your credit score and establishing you as a trustworthy candidate for any future loan requirements as well.
Completing the payments early also takes off the financial stress away from you which reflects in your ability to plan for the future without having to worry about how you will manage the repayments. As long as you have to make payments, you budgeting will be impacted by this significant payment load.
However, paying off the loan early may not be a good idea if:
- You have another debt to pay which has a higher interest rate than the personal loan. If such a debt exists, it would be advisable to use your extra funds to pay that off first, and then focus on the personal loan’s early repayments.
- You do not have enough reserve for at least 3-6 months. Putting yourself in financial stress by trying to pay off the loan early is an unwise choice. If you do not have an ample pool in your account, don’t worry about fast repayment. Rather, only ensure that you make the monthly payments. This too will keep your credit score on track.
- You foresee any big expenditures coming up. If you are expecting any kind of big expense coming up, then trying to pay off the personal loan early is not the right choice. Simply try to keep on track with scheduled payments.
Beyond these circumstances, there are a few cons of making faster payments including the following:
- If you have some extra money, and you are thinking of using it to pay off the loan quicker, you may be missing out on very lucrative investment opportunities. What this means is, as long as you make your scheduled payments in a disciplined manner, you are not hampering your credit score. So, rather than trying to pay off the loan quicker, you can also look at potential investment opportunities which will help boost your finances.
- Some lenders have strict policies against early loan repayments. If you have borrowed the money from such a lender, you run the risk of incurring penalties for paying extra money or trying to finish the loan sooner. This is why you must understand the policies of the lending institution before opting for early repayments.
- Very early repayments can also in some cases adversely impact your credit score for a temporary duration. For instance, if you pay off the loan early, your credit history can be impacted as its length would be shortened. Yet, despite this dip, it is important to remember that these hiccups are quite minor.
How To Pay Off Personal Loan Faster
If you are trying to pay off your personal loan faster than the scheduled period, there are a couple of ways you can choose from.
Also read: Can You Get a Personal Loan While on Disability?
But, you must first find out the lending institution’s policies regarding early payments, and what kind of models they accept to determine the right option for you.
Typically there are three common models:
- You can increase the amount of the monthly payments by as much as possible to cover up the debt as soon as possible. In order to do so, you can try to cut some corners in your living expenses and try to accumulate more savings. However, it does not mean compromising on necessities.
- You can opt for bi-weekly payments. Through this option, you can complete one extra payment per year, which will still be a significant step in paying off the loan faster.
- You can also put in a lump sum amount towards your loan. For instance, if you receive a gift or award that comes with a cash prize, you can use that cash to put a good dent in
your loan.
- Another way, though not suitable for most, is refinancing the loan. But, this path needs to be treated with great caution. If you are thinking about refinancing your loan, the primary requirement for this is that the interest rate you get is lower than that of the existing loan. Otherwise, you will end up paying more. Consider the overall expenditure you will incur if you choose to refinance.
Through any of these means, an individual who has the capacity to pay off their loans faster, can achieve financial freedom quicker.
Also read: What You Should Know Before Taking Out a Personal Loan
Not only do you save some amount on the interest payments, you also regain financial control quicker, which is priceless.
Those that have the capacity to pay off their personal loans early, can opt to do so to best suit their personal interests. However, it is not an essential process as long as the borrower ensures that they stick to the original repayment terms and do not start defaulting on payments. With both pros and cons to account for, this option may not be ideal for all. As such, it is the prerogative of every individual borrower to understand whether this is a good choice for them or not.
