Finance

Pros & Cons of Pre-Paying your Personal Loan

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When it comes to meeting emergency demands, the first thing that springs to mind is applying for a personal loan. The popularity of this financial instrument may be attributed to its multipurpose usage, minimal documentation, and easy use of a quick cash loan app. However, you may wish to close your personal loan account before its tenure owing to various factors. Some of the common factors are – financial ability to repay the loan, reduced payouts in interest, improving credit score, loan transfer, etc.

In most circumstances, pre-paying a personal loan is advantageous for the borrower. However, there are always two sides to a coin, so if there are advantages, then there are some disadvantages as well. In this post, we have mentioned the advantages and disadvantages of pre-paying for a loan so that you can make an informed decision.

Advantages of Pre-Paying a personal loan

Paying up your loan before the completion of the loan term is a wise move. To show you how it is beneficial to you, here are some of the known advantages of pre-payment of a personal loan.

1.     Helps Improve Your Credit Score

Your debt strain is eliminated when you pre-pay your loan, which also raises your credit score. You can maintain a high credit score by paying off your loan on time. Apart from that, your credit score is influenced by the amount of outstanding debt you have, therefore pre-paying personal loans, whether in full or in part, will raise it automatically. Having a good credit score and pre-paying your loan will also increase your chances of approval for your next loan more quickly and will even give you a chance to negotiate favorable conditions with the lender.

2.     You Can Save the Cost of Interest

Pre-paying your personal loan as soon as you can to help you save money on interest payments. There is a small pre-payment charge when you pre-pay your personal loan. When you opt to shut the loan account before maturity, the bank will lose the interest that you would have paid in the entire tenure. Therefore, they charge a pre-payment charge. But this is relatively a little price to pay in case the interest payout is huge. Plus, the best part is that since you are no longer required to pay the personal loan’s monthly interest, you are free to preserve the money or, if you want, consider putting it in mutual funds or fixed deposit plans.

3.     Makes You Go-Debt-Free Early

Taking a personal loan is quite easy, thanks to the quick cash loan app, but before you take a loan be sure that you will be responsible for repaying the debt. Though you decide the tenure of the loan based on your ability to pay, at the same time pre-paying your personal loan may reduce your debt-repayment costs or, better yet, enable you to become debt-free entirely. Aside from the financial ramifications, you won’t have to worry about making payments every month for many years, which will relieve some tension and help you achieve financial independence quickly.

4.     Reduces Your Burden of Debts

Pre-paying your whole loan amount is not something that you can do with your monthly paycheck due to budget limitations. Plus, the prime reason for choosing a longer loan tenure in the first place was your income. But, if you have gotten a bonus or another source of money, you may want to think about pre-paying a portion of your personal loan. Even while partial pre-payment might not enable you to become debt-free entirely, it does assist you to lighten your debt load. The interest you must pay on the entire outstanding loan balance will be reduced by partial pre-payment. So, if you have received a bonus and planning to pre-pay your loan amount, we advise you to do that without worrying or overthinking.

Disadvantages of Pre-Paying a Personal Loan

Now, let us move forward to the negative impacts of pre-paying a personal loan.

1.     High Pre-payment Charges

When you plan to repay a loan, the bank loses out on the rate of interest that they would have otherwise collected, if the borrower continued to repay the loan throughout the loan tenure. Due to this reason, most financial institutions levy a fee to the borrower when they choose to pre-pay their personal loan to make up for the loss of this potential income. These fines/fees could be assessed by certain institutions at a fixed rate or as interest over a predetermined period. Most lenders impose pre-payment fees of up to 4% to 5% of the total principal balance of the personal loan. In many cases, lenders further prohibit personal loan customers from foreclosing or making partial pre-payments until the completion of a certain number of EMIs.

2.     Losing a Huge Amount of Money at Once

Many borrowers pre-pay their personal loan amount by using their cash in hand, investment capital, or bonus. But there are also some negative impacts of that. Pre-paying your loan takes away your ability to handle any financial emergency brought on by occurrences like the loss of income, health problems, or other unforeseen circumstances. Then, to meet your financial crisis, you may look for another alternative or borrow from your current investment which you saved up for another purpose, or you may think about planning to take another loan. In such a case you will again fall in the loop and sometimes may get stuck in a debt trap.

Conclusion

Personal loans are an excellent financial tool to fulfill your financial needs, you can also avail online loan Be it your medical emergencies, travel diaries, wedding expenses, or big-ticket purchases, a personal loan can come to your aid. However, there are many things that you must consider and learn before availing of this facility so that you can choose the right lender and go for the best plan. You can save a lot on your loan just by choosing the right lender and knowing the terms and conditions well.

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