Debt! Certainly not the fanciest word any person wants to be around. Yes, all of us are self-concerned when it comes to debt. Nobody wants to be the person to owe money to some other person or institution. Well, if you borrowed a traditional (personal) loan for some of your needs and you just got lucky enough to get them easily at a low amount. Now, you have all the money to clear your debt. In technical terminology, it is known as pre-payment of the loan amount. Well, who wants to pay off interest to the lender over a large period of time? So, should you consider repaying off your personal loan makes sense? Well, there are consequences attached to this as well and you should halt before you make a move and it turns out to be awful for you.
When a lender lends money he lends the money at various places. Also, the same lender borrows money from other places too. So, if the lender gets the money back early he will have to bear the loss as he didn’t earn from the transaction. He has to maintain his debts as well. So, if the lender doesn’t earn he won’t be able to pay off the interest rate on the debt which is taken up by him/her. He will be into loss as he will have to pay the debt along with the interest which is up to him. For instance, if a lender has given money to a borrower for 9% interest rate for 10 years and he has borrowed money for 8.15% for 10 years. Now, if the borrower pays the money in 5 years then it is a loss to the lender. He won’t be able to earn interest on 5 years and payback the loan. So, the person will charge you pre-payment penalty as a form of the interest to gain something from you. Pre-payment can be done to the lender but it has got the following pros and cons. Also, it should be taken care of that while signing the loan agreement the borrower should see that there might not be any clause of pre-payment in the loan agreement mentioning penalties or the process can take longer than expected.
PROS OF PRE-PAYMENT OFF PERSONAL LOAN
- The first benefit of repaying off the personal loan early is that you save by paying off loans. Well, who doesn’t want their money to be safe? You save a lot on your early payments of the loan by saving the huge amount of the interest money that you might pay in the future. So, basically, you save a lot. Interest doesn’t buy anything more than the ability to pay slowly.
- Secondly, your financial strength increases when you pay off the loan early to the financial institution or the person. The additional funds can be utilised for some other purposes rather than paying off loans and interest on the loans. You become an attraction for the lenders due to your early payment and the increase in funds which increases your probability to borrow loan in the future. Also, there is an increase in your debt to income ratio which results in higher probability of borrowing along with the increase in your credit score for the future borrowings which makes you a worthy candidate.
- Paying off the personal loan early sometimes gives peace of mind to the owner. Some people just abash the word debt and feel the need to pay it off early even when financially it is not the best deal. Certainly, happiness is much more than the price for such people. So, people try to eliminate the burden of debts before their retirement so that their descendants do not suffer related to payments. While there is a condition along with such benefits. Pre-payment should be done only when there are no additional penalties on the pre-payment of the loan. The agreement while borrowing the loan shouldn’t have any pre-payment penalty clauses or it will be bad for you.
- Repaying off the personal loan early is beneficial for the borrower in the last way as the borrower can manage other debts. If the borrower has 3 debts i.e. home loan, personal loan and student loan then the borrower can decide which ones to pay off early as it will help the borrower allocate the funds for the other debts. For instance, if the personal loan has got higher interest rate than others then he can pay off the personal loan if there are no pre-payment charges as there is a fixed amount and a fixed interest on the personal loan unless no mortgage is there.
CONS OF PRE-PAYMENT OFF PERSONAL LOAN
- The first problem a borrower will face if there is a pre-payment clause in the agreement of his loan mentioning penalties on the loan. If a borrower has paid the loan early than the desired timeline. So, the lender is missing on the interest rate for the time the loan is paid earlier. Now, to recover that loss lenders often mention this clause during the agreement as a penalty. Now, if a borrower pays the loan early then he has to pay a lump-sum penalty to the lender for the early payment. This does not motivate the borrower to take the step as a con.
- The other issue that can become a problem off during personal loan pre-payment is that if nothing is mentioned in the clause. The lender can sue you and can take the money from you in the form of fees legally. So, this is also a risk many borrowers should take care off unless they are sure they have emergency funds to cover the fees.
Lastly, prepayment of the loan is a good thing to do. But, you should always keep in mind the pre-payment penalties as the lender is also in the business and he might not want to do loss. Lastly, you should always check the document before borrowing any personal loan.