Several individuals avail of personal finance to meet emergency fund requirements. Such loans are available without any collateral, which makes them popular. Furthermore, the borrowed amount may be used for any legal purpose, giving you flexibility.
You will most likely use this loan to repay it before the end of the tenure. Compared to other loans like home or auto loans, the interest rates on personal finance are higher.
Several benefits exist for prepaying part of the entire loan amount before its tenure. Generally, you may choose a longer tenure to reduce the equated monthly installment (EMI). However, the interest paid over a longer duration is higher, so repaying earlier is beneficial.
- Lower the EMI
You should use funds to repay the outstanding personal loan if you have funds available. This will enable you to lower the EMI and ensure the amount is repaid in a shorter period. When you repay the loan faster, you can save a significant amount for longer.
2. Pre-closure penalty
Financial institutions may levy a certain penalty if you repay the personal loan before the end of its duration. It is recommended you check the penalty and make an informed decision. In most instances, you can save money when you prepay, even after paying the pre-closure penalty. This is because the personal loan interest rates are higher than secured credit facilities, such as home or auto loans.
3. Improve credit score
Your credit score is directly related to the number of your outstanding debt liabilities. When you prepay the loan, it is immediately reflected in your credit score. Repaying the money before the end of the loan tenure positively affects your credit score. A higher score will ensure lenders perceive you as low-risk when you apply for another loan.
You may prepay the entire amount or some of the outstanding principal. The following will help you understand the advantages of repaying either part or the full loan amount before the loan’s tenure.
4. Full prepayment
When you prepay the entire loan amount before the end of the duration, you can save a significant amount towards the interest payout. Furthermore, the interest savings are higher when you prepay during the initial years of the loan duration. Most lenders have a minimum lock-in period during which you cannot prepay the loan amount. You should invest in high-return instruments if you have extra money during the lock-in period. The accumulated amount may be used to repay the loan after the lock-in period.
5. Partial prepayment
You may receive an annual bonus, or some other investments may mature during the loan’s duration. This amount may not be equal to the entire outstanding loan amount. However, it is beneficial to use the same to repay the loan. Partial prepayment reduces the outstanding principal, which decreases your EMI. Therefore, using the funds to repay the loan will help you save a lot in the long run.
The old saying “borrow less and repay early” is still applicable. Moreover, whyou can enjoy certain special offers en you take out a personal loan online, However, it is still debt; repaying it as soon as possible is advisable to ensure your outflows are the least.
