If you have taken a personal loan and you have got some extra money as a bonus or otherwise, the question must be in your mind, should the loan be paid off early? Most of the people feel that paying off the loan early will save the upfront interest and also get rid of the burden of monthly EMIs. But, according to financial experts, paying off the loan early is not a good deal in every situation. Let’s know the pros and cons of paying off the loan early.
What is Personal Loan Pre-payment?The process of paying the outstanding amount to the bank before the expiry of the fixed term of the personal loan is called ‘pre-payment’. In this you can pay some amount (part-payment) to reduce the principal amount of the loan, or pay the full amount and close the loan altogether, called ‘foreclosure’.
When is it beneficial to repay the loan early?Banks and financial institutions charge certain fees for early settlement of loans, called pre-payment or foreclosure charges.
Comparison of charges and interest: Your decision will be beneficial only if the interest saved by paying off the loan early is much higher than the foreclosure charges charged by the bank.No tax benefit: Unlike home loans, there is no tax exemption on personal loan interest. So if you have extra money and the interest rate is high, it is worth taking up the loan.
It is necessary to take care of the emergency fundIn the rush to pay off the loan, people often use up all their savings, which is a big mistake. Experts advise that: You must have an ’emergency fund’ equal to at least 6 months of household expenses. This fund comes in handy in difficult situations like illness or going to work. One should not jeopardize one’s complete financial security just to become debt free.
In conclusion, check the foreclosure charge in the loan agreement. Then take the right decision only by comparing the interest saved, remaining period and your savings.
