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When you take out a personal loan, you do so in a specific moment in time based on your current situation. However, times change and so do financial situations. If you suddenly find yourself in the enviable position of being able to pay off your personal loan early, it’s important that you do so with your eyes open.
In this article, we’ll give you simple and clear advice on paying off a personal loan early and what you need to be aware of.
There are a number of advantages to paying a loan off early. Over time, interest builds up. If you pay off your loan quicker, you will instantly save money on interest. When you pay a loan off early, you also kiss goodbye to that monthly payment. While you also kiss goodbye to a lump sum by settling early, ridding yourself of the monthly loan payment will allow you to budget easily every month.
It seems a little unfair that you should be penalized for repaying a loan early, but this is often the case with many loan products. Before you go swaggering to your lender with a wad of cash held aloft, it’s important to know the facts so that you don’t get landed with a hefty fee.
Early repayment, also known as early resettlement, is the term used when you pay your loan before you are legally obliged to. Many lenders and banks charge early repayment fees or prepayment penalties that can often equate to the equivalent of 1-2 months of loan interest. The amount you pay will depend on the lender and the terms set out in your loan agreement.
If you are in doubt of the early settlement amount of your loan, write to your lender and ask them to confirm this in writing.
It is natural to think that paying off a loan early will improve your credit score. However, the opposite is closer to the truth. Open credit accounts actually score higher on your credit record than closed accounts. This is because they show you are able to make regular payments in an orderly and timely fashion. A single large payment on your credit record doesn’t really do you as much good as you think it might. Instead, take a look at some cheap but reliable credit repair services. They’ll help you with some of the factors that could be keeping your score down.
There is something very satisfying about settling a loan and freeing yourself from a monthly payment. That said, if paying off your loan early is going to cost you, do you really want to throw money down the drain? Why not invest that lump sum in a savings account and make monthly payments from that account as normal? You’ll be earning interest and paying off your loan without affecting your regular checking account.
The bottom line: before repaying your loan early, take a close look at your loan conditions, including early settlement fees and any other penalties you may need to take into account. And always borrow from the best lenders (like these online loan companies) who are clear and upfront about any costs. Better yet, choose one without extra penalties and fees.