In the current economic era, a considerable number of people have opted for loans to make advancements in different areas of their lives. Some use the money as start-up capital. Others pay for vehicles or property, while others take on debt to address other debt, like mortgages, student loans, and even previous personal loans.
Online loans have become a monumental part of many people’s daily lives. When it comes to paying off a personal loan, different people have different strategies. Some might prefer making equal payments monthly while others might prefer paying bigger portions earlier on. Some loans can be repaid over a long period of time, some spanning for over a decade while some can be repaid over a short period of time. Long term loans usually have lower interest rates as compared to short-term personal loans.
Many consumers wonder if it is possible to pay off a loan early. And if so, how?
Paying off a personal loan early is indeed possible, and there are benefits to it. Even so, it is advisable for the loanee to go over the loan agreement to look for prepayment penalties for loans paid early; it’s one of the ways for the lender to earn back some money they will lose when the customer no longer needs to pay interest. Of course, not all personal loans have prepayment penalties. In this article, we take a look at some of the ways one can pay off a loan early and some of the benefits of doing so when there is no prepayment penalty.
Benefits Of Paying Off A Personal Loan Early
Some people will happily pay off their loans early so that they can have peace of mind. They don’t have to worry about the next payment installment, or even worry about forgetting to make a payment, which can be costly due to the penalties. Paying off a loan as soon as possible can be rewarding to one’s state of mind. Rather than stressing over the next payment, one can choose to focus on other things like future projects and making financial plans.
One can save money by paying off a loan early. When one clears their loan before the repayment period expires, they don’t have to pay extra interest charges. Some loans can drag on for more than a decade with interest rates adding up in the course of time. Once a loanee pays off loans early, they can use the money they would have used to pay interest for other things such as investments, luxury spending, home improvement, and business expenses. Having some money in the savings account for the future can’t hurt, especially for those headed for retirement who may want to strike some things off the bucket list.
Financial stability and flexibility
Once a person has paid off their loans and doesn’t need to worry about directing their money to pay monthly payments, they are in a position of greater financial stability. From this position, they can plan ahead for the long-term future having more money in hand. The funds they would have used to pay off installments can be redirected elsewhere. Once someone is free from any kind of loans, it affords them the financial flexibility needed to achieve their financial goals.
How To Pay Off A Loan Early
In this case, the loanee makes a payment every two weeks instead of every month. There are fifty-two weeks in a year. That means that the loanee is making twenty-six payments in the course of one year. Before the loanee does this, however, they have to have to talk it over with the loaner to avoid incurring penalties. Making bi-weekly payments can help the consumer save money. There will be lower interest rates since the payments are made more often. In the long run, the bi-weekly payments add up to an extra monthly payment a year. This method can also reduce the time the consumer has to repay their loan considerably since the payments are more frequent compared to paying monthly.
One can do this by simply paying extra money alongside the monthly payments. This way the consumer will get to pay off their loan more quickly. No one would mind shaving off a couple of years or months from their loan repayment period. In this payment method, most of the extra money one makes or gets (for example; money from tax refunds) can be used to pay off the loan. Even extra small amounts put towards the repayment of the loan can add up to make a significant difference in the course of time.
However, this method requires discipline and consistency. One can choose to spread out the extra payments monthly or pay it all at a specific time during the year. The loaner should also be alerted about the extra payments so as to keep track of their payments. Usually, this is done with a note to the lender that says “apply to the principle.”
Rounding up payments
When rounding up payments, one simply rounds up the payment to a higher figure. For instance, if you had monthly payments of three hundred and fifty dollars, you can round up the amount to four hundred dollars. That’s an extra fifty dollars every month, and it adds up to an extra six hundred dollars yearly. This method is very effective in knocking down some time off the loan payments.
Choosing A Strategy For Paying Off Your Loan Early
Choose a good strategy for paying off your debt early to avoid prepayment penalties.
There are different kinds of personal loans online, and there are suitable payment methods for each type. One has to choose a strategy that works for their specific case. Choosing the right payment strategy for your loan is essential if you want to do it right and pay off all your loans. First, the general basic strategy for paying off a loan early is to pay more than the set minimum amount. The consumer can start off by summarizing all the debts that they have, listing the amount, the interest rates and the type. This way, it is easier to sort them out and to know which loan needs the utmost attention.
Another strategy is to focus on the loans with the highest interests and dealing with those with lesser interest rates later. Paying off the loans with the highest amount of interest charges can help save a lot of money. Once this is settled, the loanee can start knocking those with smaller interest rates off their list. While choosing a strategy for the loan repayment, the loanee needs to consider their capital needs and make sure that their cash flow won’t suffer even as they focus on paying their loan early.
Disadvantages Of Paying Off A Personal Loan Early
While there are great benefits to paying off a personal loan before the due time, there can be a few disadvantages as well. For instance, many people are concerned about their credit score and will wonder what impact an early repayment will have on their credit rating. But will paying off a loan early hurt one’s credit score? In some instances, it might. Most credit agencies look for a history of long term and on time loan payments in accounts. Such accounts get a much higher credit score than those that simply pay off loans as soon as possible.
Another disadvantage of paying off your loan beforehand is when there are prepayment penalties in the loan agreement. As stated earlier, it is important for the loanee to look out for the prepayment penalty. Some prepayment penalties are not worth the cost of paying the loan early. Another disadvantage is that making extra payments to offset the loan early may take money that may have otherwise been used for financial emergencies.
While loans are part of our daily lives, the idea of living loan free and debt free is to be lauded. Paying off debt early requires discipline, integrity, and orderliness, especially if you have multiple personal loans. A borrower has to find the right strategy that will work for them and stick to it. It will enable them to pay off their debts in a systematic and orderly manner. Otherwise, it might be like trying to empty a river with a bucket.
The loanee should also go through and understand the terms of the loan agreement carefully; it will prevent them from incurring unnecessary penalties that might have them dig deeper into their pockets. They can also renegotiate the terms of the agreement with the lender should the terms not be agreeable to the loanee’s payment strategy. In instances where paying off early costs more, it would be more advisable for the loanee to see out his loan payments patiently. All things considered, paying off your loan early can be beneficial. And after all, who doesn’t want to live debt free?