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Dos And Don’ts Of Repaying Your Personal Loan Early

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Finance

If you’ve been making monthly personal loan payments for a while, it may seem tempting to repay your personal loan in full if you happen to get your hands on some extra money. However, there are certain things you should take into consideration before you do this. Here are some useful dos and don’ts to consider.

Dos
  1. Prioritize repaying high-interest debts: Personal loans are likely to have pretty reasonable interest rates. So, if you are still carrying high-interest debts like an outstanding credit card balance or if you have loans that are secured by collateral, you may want to clear these debts first.
  2. Set up an emergency fund before repaying your personal loan: An emergency fund is meant to serve as a financial safety net in times of emergencies like if you lose your job or need to pay for emergency medical expenses. So, ensure that you have sizable savings in your emergency fund before you repay your personal loan.
  3. Be aware of the prepayment charges: Many banks levy prepayment charges when you prepay loans. So, make sure to work out how much you will be able to save in interest payments and check if it is worth repaying your loan in advance.
  4. Assess your spending habits: If you are likely to spend the additional money you have rather than save or invest it, it may be best to just use the money to repay your personal loan.
Dont’s:
  1. Don’t miss out on earning higher returns by making alternate investments: While prepaying your loan can help you save some money, you may be able to earn higher returns if you invest what you have wisely. So, make sure to consider whether investing the money you have in hand will make more sense financially than repaying your loan.
  2. Don’t sweat it: If repaying your personal loan early will give you peace of mind, then it may be best to just repay your personal loan in full.

Remember that the lender will close your loan account once you repay the outstanding debt. This could cause a slight dip in your credit score. Therefore, ensure that you evaluate the benefits and drawbacks of repaying your personal loan early before you make any decision!