Loans are taken by a customer from a respective banking institution to meet those urgent financial needs which can’t be fulfilled by our mere savings. Loans cover the urgent problem you were facing but the constant pressure of paying your instalment on time wears you off every month. You may often wonder, if only you have won a lottery prize, you could have cleared out all your debts.
Of course, who doesn’t want to clear out their debts and live freely without any tension? Check the amount of personal loan you can apply for through the personal loan eligibility calculator to calculate and map your borrowed money and ways to repay it back. You can visit https://upwards.in/personal-loan-eligibility-calculator to get an accurate calculation of the same.
But closing your debt accounts before the ending of your tenure has its own individual advantages and disadvantages.
- Prolonging your debt amount on your credit card or other loans only attracts high-interest rates with more time. Personal loans being unsecured in nature as you are issued the loan without any guarantor or any collateral against any of the customer’s asset, the rate of interest on such loans is relatively high ranging from 15-20% or over 20% sometimes. A personal loan is preferred as it can recover an urgent issue and are offered by various banks with different charges and fees. However, if you pay off the debt amount before the stipulated time or paid partly, there are certain advantages :
- If the full amount can be prepaid ahead of the stipulated time, the customer tends to save a lot from the amount that was supposed to be paid off as interest. A loan is given to a customer generally comes within a lock-in period of one year usually. The prepayment of the whole amount before the tenure can help us forego less on the amount in interest.
[Make sure to check if the terms of your loan include pre-payment penalty clause, otherwise, you will be penalized.]
- Even, if you have already paid a lot on the interest, you can pay off the excess cash in the later stage to avoid any more loss of amount in interest and get rid of the debt.
- Part-payment of a loan is paying off a significant lump sum amount of the principal, but it is not equivalent to the entire amount to be cleared. Part-payment works to bring down your principal amount to be paid and as a result, automatically brings down the EMI amount and the total amount of interest. This is an easy way to save your money on interest.
- A part-payment of a loan can be paid more than once. With every payment, the EMI goes down.
- But, the hack of paying off early before tenure is obstructed by the prepayment penalties.
[A prepayment penalty is a fee charged if the borrower pays off the existing loan principal ahead of the scheduled time. A prepayment penalty fee is the percentage of your loan’s total balance]
But why would the lender be unsatisfied with your early payment to even charge a prepayment penalty? It is wise to keep in mind that, paying off the borrowed money brings down the amount of money in interest and lenders make their profit from interest.
- Therefore many loan services do not include the pre penalty clause in their agreement. However, there are loans where prepayment doesn’t really help in your motive, for instance, the amortized loans. It is not always applicable to pay off ahead of tenure to save your money.
There are advantages but there are lots of shortcomings in paying off your loan amount before the tenure. Carefully consider these tips before making a decision.
