The question of closing a Personal Loan early is frequently asked, and here's why! Personal Loans act as lifesavers during crises. However, many borrowers only need these emergency funds temporarily. In such situations, continuing to repay Personal Loans for years doesn't seem logical. Opting for prepayment to close a Personal Loan ahead of schedule can significantly reduce interest costs. But is it possible to close a Personal Loan early? If so, how can it be done?
Personal Loans and interest rates
Personal Loans are a type of unsecured loan extended by banks and financial institutions to you to meet your personal financial needs. They come with unrestricted end use, meaning you can use the funds for any purpose. This includes marriage, education, debt consolidation, exotic vacations, making big purchases etc.
Being an unsecured loan, the interest rate of Personal Loans is usually higher than the secured loans. The actual interest rate varies across different lenders and as per the profile of the borrower.
When facing financial problems, choose a lender offering a Personal Loan with affordable rates and flexible repayment terms. Also, verify prepayment charges to avoid penalties further.
Why should you pay off Personal Loans faster?
Before getting to how to clear a Personal Loan faster, let’s understand the reasons for doing so. If the situation permits, you should consider paying off personal loans faster and the reasons are simple. As stated earlier, many people opt for Personal Loans to meet their sudden shortage of funds. In many cases, such a shortage lasts for a few months. But Personal Loans come with a tenure of 1 year to as long as 5 years. In such cases, following the original tenure leads to unnecessary interest outflow. Also, it hinders your ability to opt for other credit facilities.
The faster you pay off your loans, the earlier you become debt-free. Further, most people save money after meeting their monthly expenses. If you have a good amount of money left after meeting your needs, why not go for prepaying your debt? This can help you save a lot of interest costs.
Top reasons why repaying debt ahead of schedule could be a wise decision
You might have opted for a longer tenure for your Personal Loan so as to reduce your monthly EMI amount. However, this also means a high-interest amount. As soon as the crisis is averted, you should consider prepaying your Personal Loan to reduce interest expenses. In this manner, you can save a substantial amount in the long run while achieving financial freedom.
How to close Personal Loans early?
Here’s how to repay Personal Loans faster and early:
- Determine your obligations: You should determine your present debt obligations apart from the Personal Loan amount outstanding. This can include your other loans, Credit Card bills etc. The aim is to determine your pre-payment capacity. You should consider prepaying only after meeting your monthly needs and other financial obligations. You cannot consider prepaying your Personal Loan if it ends up increasing your financial burden.
- Balance transfer: Balance transfer means transferring your outstanding loan balance to a new lender. It is an effective way if you are searching ideas for how to close a Personal Loan faster. You can consider transferring your Personal Loan to a new lender if it offers better terms and lower interest rates. This can help you save a lot of interest. The new lender pays the outstanding loan amount to the existing lender. You need to pay all your subsequent EMIs to your new lender. This provides you with the benefit in terms of better interest rates and better services.
- Pay using bonus: Many companies provide annual bonuses or variable pay in addition to the regular salary. These amounts often serve as supplementary funds for employees. You can use these funds to prepay your Personal Loan to save significant interest costs. Always remember – a penny saved is a penny earned. You don’t need to allocate your entire bonus to prepayment but allocating a considerable portion can help you get debt-free earlier.
Guidelines for action and avoidance
Here are certain actions and avoidance points you should consider when planning how to close a loan early:
- Consider your monthly expenses: You need to consider your monthly expenses before going ahead with early payment. Calculate your monthly expenses and determine how much you can save to prepay your Personal Loan.
- Check out the prepayment terms: Before going ahead with the prepayment, you should go through the prepayment terms. Many lenders levy prepayment charges in case of early payments. However, this is usually slab-wise. At the later stage of Personal Loans, the prepayment charges are reduced and even get to nil.
- Don’t withdraw from your retirement funds: While prepaying your Personal Loan can save you a lot of interest cost, it is not worth it to withdraw money from your retirement funds. It will disrupt the compounding effect and will leave you financially vulnerable.
Also Read: How to pay Credit Card bill with another Credit Card?
Summing up
Prepaying Personal Loans served as a wise decision for many borrowers who availed of this loan just to meet their short-term sudden financial needs. Knowing how to close a Personal Loan early can help you act smartly and consider prepayment. Determining your monthly expenses, savings capacity and other financial obligations will allow you to make this wise decision. Manage your finances carefully and become debt-free sooner.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
