A personal loan is a helpful option for meeting several needs that arise suddenly without warning. These may include everything from medical emergencies and sudden home repairs or renovations to last-minute wedding costs, higher education expenditure, buying gadgets/appliances, and even covering travel costs.
These loans are unsecured loans (not secured by any collateral/guarantee) and come with shorter tenures ranging from 2-5 years on average. They also come with competitive rates of interest and are comparatively easier to obtain than other loan types, with minimal documentation and paperwork required.
However, just because a personal loan can be quickly obtained to cover your needs in the short term, it does not mean that you can be irresponsible about its repayment. You should follow these tips for repaying your personal loan in the best possible manner. Make sure to organize your loan documents properly as well.
Follow these tips while repaying your personal loan
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Set your priorities straight
No matter what, repaying your personal loan should be your first priority. Whenever you apply for the loan, make sure that you have worked out your monthly obligations in terms of the EMI payment.
This will help you prioritize repayment of the loan above everything else. It is only this approach that will help you clear off the loan without any delays or defaults.
If you cannot be sure about your financial scenario a few months or years down the line, create a separate kitty that can cover at least 2-3 months of EMIs for the personal loan. This will help you stay on track with your repayment plan.
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Auto-debits always work
If you authorize the lender to automatically debit the personal loan EMI every month from your bank account, then it will help you avoid any defaults or lapses in repayment.
This will keep your credit score intact as well. Wherever possible, choose the auto-debit option on a fixed day each month. Keep at least a month’s EMI in advance in this account.
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Consolidate other debt
If you have credit card debts and other liabilities, make sure that you consolidate them into a single personal loan if possible, in order to save on higher interest costs and improve your credit score. This will also help you stay on track towards repaying your loan in a disciplined manner in the future.
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Choose a balance transfer if required
If you have a higher interest rate on your personal loan, then it automatically equates to higher EMIs which may be difficult to repay at times. If you find another offer from a lender which reduces the rate of interest and subsequently your EMIs, then you can choose a balance transfer accordingly. However, keep in mind that this may lead to your loan tenure going up. Take your decision after giving it ample consideration.
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Try and clear off your loan faster
You can try accumulating some extra funds that you can later use to repay the personal loan. Do keep an eye out for foreclosure or prepayment charges on the personal loan app.
If it works out reasonably for you, then you can use that new bonus or surplus money to clear off the loan in quicker time, thereby giving your credit score a boost and helping you become debt-free in the bargain.
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Keep tracking your loan details
Another thing that most people do not take seriously is the importance of periodically tracking their loan details. This will help you stay updated on the upcoming EMI payments, the amount which still remains outstanding, the interest component that is being deducted, and so on. Staying in the loop will automatically get you more committed towards repaying your personal loan.
Pros and Cons of Opting for Personal Loan Prepayment
Pros:
There are several benefits to paying off your personal loan ahead of schedule:
- Boosting Your Credit Score: One major advantage is that it can significantly improve your credit score and overall credit history. This can be particularly beneficial if you plan to apply for loans in the future, as lenders may offer you lower interest rates due to your improved creditworthiness.
- Saving on Interest Costs: By prepaying your personal loan, you can save a significant amount on interest costs. If you wait until the end of the loan term, you’ll end up paying more in interest. However, by paying off your loan early, you can reduce the total interest paid. You can use a Loan Prepayment Calculator to estimate your savings before you understand how to close a personal loan early.
- Partial Prepayment Benefits: Even if you don’t have enough funds to pay off the entire loan at once, making partial payments can still be advantageous. By reducing the outstanding loan amount, you’ll also decrease your monthly payments (EMIs) and the total interest paid over the loan term. The earlier you make these partial payments, the more you’ll save in the long run.
Cons:
However, there are also some drawbacks to consider when prepaying your personal loan:
- Lump-Sum Payment: Prepaying your loan, whether in full or in part, requires a significant lump-sum payment. This can impact your financial stability, as it may tie up funds that you could otherwise use for other purposes.
- Impact on Asset Liquidity: If you use your liquid assets to prepay your loan, it could affect your liquidity in the event of a financial emergency or unexpected expenses in the future. Be cautious about using all your available funds for loan prepayment during your personal loan preclosure.
- Foreclosure Charges: Lenders typically charge a foreclosure fee if you opt for personal loan preclosure before the agreed-upon tenure ends. This additional cost should be considered when deciding whether to prepay your personal loan.
Before making a decision, it’s essential to get professional guidance, assess your financial situation, and make an informed choice based on your specific circumstances.
Short-Term Loans with No Prepayment Penalties
A short-term loan typically spans a repayment period of one year or less. These loans often necessitate minimal collateral and a streamlined documentation process, typically involving proof of employment, monthly income, and identification. Additionally, the credit criteria for short-term loans tend to be less stringent compared to other loan categories.
Short-term loans like personal loans without prepayment charges offer flexibility and freedom to borrowers. These loans allow individuals to repay the borrowed amount ahead of schedule without incurring any additional charges. This feature provides financial relief and helps borrowers save money on interest costs by paying off the loan early. Whether it’s unexpected windfalls or improved financial situations, borrowers can take advantage of the option to settle their loans sooner. Such loans empower individuals to manage their finances effectively and achieve their financial goals without being tied down by rigid repayment terms. Consider exploring trusted loan apps like LazyPay for your financial needs.
Conclusion
These are some tips that you should keep in mind while repaying your personal loan. Before taking the loan, get an idea of the monthly EMI payable by using an online EMI calculator.
Work out this figure into your monthly budget and stick to the financial plan that you make for the next few months or years. Responsible and timely repayment will not only help you clear off your pending debts but also improve your credit score and history.
This will help you obtain loans at better rates from lenders in the future, especially when you wish to fulfill aspirations like buying a home or a car down the line.