How to Pay Off Your Personal Loans Faster?
Securing any loan – be it personal, home or education, once the basic criteria have been fulfilled is not very difficult. However, the challenge sometimes is the repayment of these loans. Many people are opting for personal loans to meet their immediate financial requirements. Once the loan has been sanctioned and loan terms and conditions have been carefully understood, the daunting task would be to repay these loans on time.
Sometimes, there is an urge among a few borrowers to pay these loans faster, even before the stipulated time. Even if you feel that you may not be able to repay it sooner than you think, it is always beneficial to have a precise understanding of quick repayment strategies. Because it may come in handy when you are faced with a situation where you have to decide on pre-payment in the middle of your loan tenure. If you follow a systematic process and thoroughly understand the tools and methods, you can plan your repayment strategy smartly and repay the loan faster than you’d expect.
What is a Personal Loan?
A personal loan is an unsecured credit provided by a bank or a financial institution if you need money to fulfill some of your immediate, personal requirements, ranging from renovating your home, planning a wedding, or urgent medical expenses. Personal loans are often the easiest, quickest, and hassle-free way to finance your needs and indulgences at any given time. The benefit of this multi-purpose loan is that it doesn’t seek any collateral or security and is processed faster than other loans. This type of loan requires minimum documentation, and the approvals are often quick.
Once the financial institution is convinced of your ability to repay, the loans are disbursed within a few hours to a few days. Some of the criteria to avail this loan include your employment status, income level, credit history, professional history. And based on your repayment capacity, you can choose the tenure, and interest rates on personal loan could be slightly higher than other loans. Still, if you have a good credit history and a long relationship with the lending institution, you could get some good deals on the interest rate. Once you start the repayment process, there could come a time when you want to close the loan before the stipulated time. Let us understand why paying off loans faster could benefit you and different ways and approaches to take to wrap your repayments quicker.
Why Should You Pay Off Personal Loans Faster?
Paying off personal loans faster, within the stipulated time or before that will enhance your credit score by strengthening your financial situation and also increase your eligibility when you apply for a loan the next time. Paying off your debt faster will also help reduce the total interest charges and therefore help you save more money than expected.
It is a no-brainer that the faster you pay off the loan, the less time you spend in debt. In addition, once you have closed your loan, you will be in a position to use a chunk of money to invest or spend on something you’ve wanted for a long time and, more importantly, the fact that you are no longer in debt will give you peace of mind. But before you pay off your loans quickly, you need to factor in many things, such as a pre-payment penalty that a few lenders may charge. However, if there are no pre-payment charges or you end up saving money despite the pre-payment penalty, you could still go ahead and clear the debt.
If you do not dip on your savings or emergency accounts and are in a financially strong position to pay off a sizeable chunk faster, lower your total interest charges, so paying off your loan early will be a wise decision.
In short, here are the reasons why repaying off debt ahead of schedule could be a wise decision
- Save money on total interest
- Lower debt-to-income ratio
- Improved credit score
- Eligible for future loans with a better rate
- In a better position to spend on other expenditure
- Peace of mind
Ways to Repay The Personal Loan Quickly
Analyse Your Debt and Other Obligations
Before you begin the process of paying off your personal loan, take a good look at your debts. Make sure to review your other loans, the credit card balance, and any other unpaid component. It is important to understand your financial capacity before you go ahead and pay off your personal loan debt. If you have too many outstanding bills and loans, paying off the loan faster will not make any sense and will put you in financial trouble. If the calculation leads to savings and a comfortable bank balance, then go ahead and pay off the loan. Have a budget plan of your income, savings, and expenses, and then make the decision based on your income and obligations.
Pre-paying Your Loan
It is possible that in between the loan term, you were able to get access to more funds and want to close the loan by pre-paying the loan amount. Many banks have pre-payment options – while some seek heavy pre-payment penalties, some others don’t. A pre-payment penalty is levied by lenders when borrowers decide to pay off the loan amount before the stipulated repayment tenure. The ideal option would be to go for lenders that don’t levy this penalty. Pre-payment can bring down your monthly installment burden. If the lenders impose a penalty, make sure that compare the penalty amount with the loan amount left to pay and understand if you are saving enough money by paying early despite the penalty. If you can save up enough on the total interest, you can opt for repayment.
Personal Loan Balance Transfer
If you pay a higher interest rate on your existing personal loan, consider changing the lender who can sanction the loan at an affordable interest rate. The lower interest rate could enable you to pay off the loan quickly with the new lender. Besides, you go for the new lender after closing the outstanding amount with the existing lender. The transfer of a personal loan balance is possible if you have a good credit score. Make sure to factor in penalty charges in your existing bank and the processing fee charged by the new lender before going for this transfer.
Make An Extra Payment
You can add an extra payment every year to close the loan faster. If your EMI is Rs 10,000, you could shell out an extra Rs 10,000 during the year. If you cannot pay the extra in one go, you could spread this payment evenly over the entire year. With this extra payment, you are essentially paying Rs 10,833 every month, which will bring you closer to paying off the loan early.
Pay Off A Chunk Of Your Loan Using Variable Pay Or Bonus
Many organizations give a chunk of bonus or variable pay at the end of the financial year. This portion can be put aside to pay off the loan. This way, you will be able to make the payments faster with each passing year and eventually close it earlier than the stipulated time.
Prioritise Repaying Personal Loans Before All Else
With an increasing number of people falling into a debt trap after taking multiple credits, it is important to prioritize repayment strategically. A personal loan attracts higher interest rates when compared to a car or home loan. The borrower must pay off the loan with a higher interest rate first. Prioritizing debt will ensure you pay off your loans quickly, especially personal loan which usually attracts a higher interest rate.
Understand Lender Payment Programs
Some banks and other financial institutions have packages and programs designed to help borrowers pay off the person loan faster. You can look at those and understand different ways of repayment by assessing your current financial situation.
Dos and Don’ts
Before jumping the gun on paying off your personal loans quickly, consider these points and then make a decision –
Examine Your Monthly Expenses
You should consider your fixed expenditure such as rent, groceries, electricity, etc., and keep that chunk aside, no matter what. Also, understand if you have other loans, debt, etc. The decision to repay the personal loan faster should be only after considering these factors and understanding whether you will be financially stable after making that repayment in one go.
Keep Adequate Savings Aside
Do not take money out of savings to pay off personal loans unless necessary. Make sure that you have emergency funds kept aside while making this repayment. A safety net is always necessary, and it does not make sense to close the loan and have no money in your bank account. If you have earmarked money for certain long-term goals like children’s education, marriage, etc., try not to dip into them.
Understand Pre-payment Terms
Some banks levy pre-payment charges from the lender for paying the loan before the scheduled time, while others don’t. Understand the fine print of these charges. Calculate whether this amount is higher than the interest you will be paying in the remaining months. If it is lower and ends up saving money, then go ahead and close the loan.
Don’t Rob Your Retirement Funds
To pay off loans early, do not touch your retirement funds. You may have kept it for the long run, and it may be accruing interests. Breaking that account to pay off the loan is not advisable.
- If you have an existing home loan and need additional loan money, it is best to go for a top-up loan against the existing loan instead of a personal loan. Due to a relatively lower interest rate and flexible loan tenure, the top-up loan is a better option than a personal loan. The lower interest rate will also ensure timely repayment or quick repayment.
- Multiple debts may not be a good idea. It is ideal to opt for a debt consolidation plan where all your loans – personal, home, and even credit card debts. They can be clubbed into one unit. This will ensure a single pay-out, and the interest rates in a debt consolidation plan will be much lower than paying for individual loans. This will help you manage your finances better and pay off your debts early.
- Understand the pre-payment terms of your lender
- Save as much as possible from your income so that you can make extra loan payments whenever possible
- Use bonuses and variable pay to pay off the EMI
- Pay off personal loans before other loans as personal loans come with higher interest rates as compared to home or car loans
- Understand your monthly expenses and other obligations before early repayment of your personal loan
- Make sure not to dip on your savings and emergency funds to pay off your personal loan early
- Do not overthink it. If you are in a hurry to close that loan quick, understand the terms, and make the decision
The objective of early repayment of your personal loan is to reduce your debt obligation, save money in the long run and improve your overall financial standing. Paying off your personal loans faster will boost your credit score and will most likely improve your chances of securing another loan with a lower interest rate. But before you close the loan, analyze your income and expenditure, examine your other obligations and debts and read the fine print on pre-payment penalties and other fees charged by lenders.
Early closure of the loan may not be something a borrower would think of when taking a loan. However, since the future is unpredictable, it is always wise to understand all the different aspects and weigh the pros and cons of pre-payment ahead of time so that you are not left clueless when left with a choice to close the loan quickly. Make an informed decision well in advance based on the points mentioned above before deciding to pay off your debt early.