How Important is it to Pay Off Your Personal Loan Sooner?
Loans have become a way of life now. The cost of living is going up. Life’s necessities such as housing and transport are becoming out of our immediate reach. It is not uncommon to pile on a number of loans such as car loan, home loan, etc. and then get trapped paying off a large number of EMIs. In fact, you may even take on personal loans, in order to meet immediate expenses of a personal nature. But being in a very high amount of extended debt is detrimental to one’s financial health. It is always important to carry out financial planning well, and pay off your personal loans soon.
Is it Better to Pay Off Your Loans Early?
We often hear our friends and family advise us that paying off any kind of personal loan early is the ideal thing to do. Debt is a bad place to be in and who can predict the future? It is better to be financially secure now by throwing off debt, they say. Also, there is the question of interest charged. In most cases people prefer to pay off loan early to avoid interest. But your decision depends on a number of factors.
For example, loans like credit card debt have very high-interest rates and are best paid off early. This advice is also true for loans taken to pay off depreciating assets. These are the assets whose value only reduces with time, for example a car. Another advantage is that you can divert those funds to more important expenses such as your kid’s education, investment and insurance, emergency savings etc.
However, the reality is that there may be some caveats to paying off loan faster. You may gain or lose depending on the terms and conditions of the loan.
- Some lenders may penalise you for foreclosure of loans, for example, a number of car loan services charge an “early penalty” for paying a loan off before the tenure.
- Some loans such as student education loans are meant as tax-saving loans, so you will lose your tax-saving advantage if you pay it off early.
These factors may result in a financial disadvantage. So, when looking for a loan, look for one with no prepayment penalties so that you have some flexibility of getting rid of your debt without incurring additional expenses. The answer to the question, “if I pay off my personal loan early do I save on interest?”, is that it all depends on the terms of the loan scheme.
How to Pay Off Personal Loan Early?
Loans that you should consider paying off early are auto loans, personal loans and credit cards. For credit cards and other high-interest credit instruments, a good habit is to keep money aside on a bi-monthly basis so that all your financial commitments do not accumulate towards the month end. Similarly, when you accumulate a lump sum amount of money, rather than going for an extravagant purchase, make a one-off payment towards your loan. Another option to help better manage a number of loans and pay them off is to opt for a debt consolidation loan, where you can have a single view of your debt status and manage it better. There are various options to help you pay off your loan early, so choose the one that suits you.
Does Paying Off a Loan Early Hurt Credit?
As a General Rule, The More The Debt, the greater the hit to your credit score. Freeing yourself of debt can result in an increase in your credit score i.e. your CIBIL score. Lenders will now start trusting you. They can see that you are in a good financial position to repay any additional loans that you take on. Hence, paying off personal loan early is a good idea to improve your credit score. Not to mention that paying off loans will improve your overall savings and save you a lot of stress!
There is always a tussle between paying off loans vs saving for other purposes like investments or future expenses such as education. It is important to know all the facts and impacts before taking an informed decision about whether it is better to pay off your loans or save that money.