- Category: Advice & Tips
- Published: January 15, 2014
- Written by Jennifer Winget
There comes a time in everyone’s life when there is a need to get a loan. A loan doesn’t really mean that you’re facing a financial crunch or going through hard times. It can be taken for good reasons as well such as for home improvement, for expansion of business and other such reasons.
Once you take a loan, you might start searching for ways to pay off your loan as quickly as possible. On, the contrary you’ll also find a lot people finding it useless to pay off a loan early.
But after a proper understanding and consideration, you will realize that it’s wiser to pay off before the scheduled payment date. Lets us find out why this makes a sense.
The Sooner the better
Taking out loan installments every month from your salary or monthly business profit is very difficult. You’ve to make sure that each month you’ve sufficient money in hand to pay back the installment without any penalties. While accommodating sudden unforeseen expenses, you may face cash problem because a significant part of your income goes in repayment. The longer the period of repayment, the more you will feel trapped. It’s quite natural that after few months that you’ll start feeling sick of this monthly payment and wish you could pay it back as soon as possible.
But the chances are that you might have to pay extra for paying back loan before time. Very few loans are designed in a way that the buyer can pay it off early without paying anything extra. So it’s advised that you’ve a word with the bank authorities and inquire for the repayment options in first place.
Saving the interest
The longer the period, the more interest you pay. For instance on a 30 year fixed rate loan you’ll be paying as much interest as the principal amount. So the early you pay of the principal the lesser you’ll be paying for the interest. If you just pay one extra repayment every year, you can shorten your loan pay back duration by five years, that’ll be 25 years in total.
Once you are free from a loan and paid off a significant debt, your credit score will improve significantly and you’ll be free to qualify for another loan. You can do a lot many other things with the second loan like purchase a new home or use it for other investment purposes. And because you’re not entitled to pay back any loan, you’re cash flow will improve significantly.
Increases the savings
By paying back the loan amount early, you can increase your savings as good portion of your monthly income is saved from going into fixed monthly installments. So instead of paying more interest on loans, you can earn interest from the bank for saving money. Whatever may be the reason for taking a second look or personal loan but paying off early does have its own set of advantages. If you too feel trapped in the EMIs, go ahead and break free.