Before getting a personal loan to fund your expenses, it is important to know how to repay it to avoid extra charges over the existing amount. While paying the loan on the due date is an essential practice, paying off your loan before the due date has added benefits.
Ways to pay personal loan faster
Repayment capacity: Repaying your personal loan will solely depend on your income. Therefore, it is important to know about your repayment capability before planning to pay off the personal loan. With your current sources of income, have an estimate of how much you will be able to use for loan repayment. However, while estimating your repayment capacity, make sure to have excess funds from your savings to address emergency expenses.
Repayment planning: Before paying off your personal loan, it is important to estimate the total amount due. Make a list of all the payments made so far and the amount due. Additionally, prepare a list of all the other bills due for the month apart from the personal loan. Following this, make a smart repayment plan that is feasible with your income. This will help you make timely payments without hurting your finances.
Extra income:If you have extra income or a bonus in a particular month, try to use it to pay off your personal loan. The extra amount will be added to your existing EMI payments, helping you repay your loan before time runs out.
Extra EMI: Try to pay an extra EMI every year. This will help you to clear off your personal loan before time in the long run. By paying an extra EMI every year, the principal and interest amount are reduced every year. However, paying an extra EMI is not feasible for all considering limited finances.
In such a scenario, you can divide one month’s EMI into smaller amounts over the year. This smaller amount can be paid with each month’s EMI. This will reduce your debt over time.
Round off EMI: In many cases, the EMI amount is in decimals. If you want to pay your loan fast, pay a rounded figure as EMI if it is in decimals. The rounded-off amount will mean a little extra payment on the EMI amount.
Loan balance transfer: If you have a personal loan at a high interest owing to your previous financing options, you can consider a loan balance transfer. This means you can get a new loan at a lower interest and convenient terms, which could be used to repay the existing loan. With better interest rates and convenient repayment terms, you can pay a loan easily on time.
Point to be noted: Many lenders may charge a pre-payment penalty for paying off the debt before the due date. This penalty is calculated based on the existing due amount and the interest that the lender will lose due to repayment before time.For most lenders, this amount will be around 2 per cent to 5 per cent of the loan amount, according to the Bank of Baroda.
However, you must check with your bank on the percentage of pre-payment penalty. Make sure to check these details carefully in your loan agreement before getting a personal loan. If you want to avoid this charge, you can opt for lenders that do not levy pre-payment penalties or a lender that lets you repay the loan amount without a penalty after a specific period of time.
In conclusion, paying off your personal loan before the due date has many benefits. However, it must be noted that there is no pressure to do so. After understanding your repayment capability and the existing amount due, make sure to make a plan that suits your financial situation.