May 26, 2021
8 Do’s and Don’ts for the Early Repayment of Your Loan
By : Ellie Brown
The financial experts recommend prepayment of the loan to save money on the overall interest. However, in many cases where the borrowers end up paying more with the prepayment than the original agreement. You can blame the fine print on the loan terms or the lack of knowledge for this situation.
You can educate yourself about loans and the terminology used by the lenders to save significant money on the repayment. It is a long-term commitment with severe consequences for your budget and credit profile. Therefore, a few hours of research will not hurt as much as negligence.
Here are some dos and don’ts for the loan prepayment to clear your basic to avoid some of the most common mistakes.
- Select the Loan Wisely
There are more than just one loan type and terms based on your requirement. Every other financial institution will offer its best interest rate for your credit profile. Do not consider the interest as the only factor to decide the loan offer.
There are flexible repayment options, prepayment fees, and other aspects that determine the overall cost of the loan. You should consider the repayment holiday for the long-term loan as there may come another trouble to disrupt finances. For flexile plans, you should consider direct lenders as they offer personalised loans without guarantor and security.
- Do Not Miss the Instalments
You may want to miss the instalment because of the tight budget during troubling times. However, it is not advised since the consequences are more than a late payment fee. Your plan to repay the loan early will take a hit, and the interest will also increase.
Missed payments also affect the credit ratings to increase problems with future loan applications. You should try to find some space in the budget for repayment by eliminating the unnecessary expenses. In the end, explain the situation to the lender for a feasible solution.
- Gather the Documents
The list of documents required to get a loan is easily available on the website of the lender. You can gather the documents in advance to fast track and simplify the process. The lender may appreciate the efforts with increased chances of approval or a better offer.
- Do Not Prepay Hastily
Do not initiate the prepayment request without reading the agreement and terms. You may lose more money with the prepayment than the original arrangement. Therefore, check whether the lender is charging a prepayment fee on your loan.
Many times, borrowers opt for refinancing to reduce the instalments or overall cost of the loan. These options come with an application and processing fee for the loan. Therefore, consider every fee and charges before starting the prepayment of the loan.
- Stick to the Budget
You don’t want to stress the budget with unmanageable instalments to repay the loan early. Many borrowers select a shorter duration to save money on the overall interest. However, it soon results in more problems because the budget is too tight for heavy instalments.
Select a longer duration for the loan to create a manageable repayment plan. It will reduce the chances of missed payments, defaults, and the negative impact on the credit ratings.
- Don’t Use Savings for Repayment
Your emergency fund is to manage the finances during an emergency. Many people use it for loan prepayment only to end up with more troubles. Therefore, it is advised to step aside savings and avoid their use for repayment.
This also includes the use of a retirement fund for the early repayment of a loan. It will be tough to start the savings from zero once the amount is spent.
- Pay More than Required
Make a habit of paying more amount for the instalment that required. It will help you save money in the long-term if the instalments are reduced even by a couple of months. You can add the budget surplus to the instalment for early repayment.
If the budget is tight, try to round up with amount by adding a few pounds to it. It will help the repayment with minimal stress on the budget.
- Don’t Overlook the Benefits
A loan is not always a financial burden as it sometimes has some benefits attached to it. The house mortgage provides tax benefits on the interest to the borrowers. Therefore, check the tax benefits before repaying the loan early.
Moreover, many people use the additional money for investment to get more returns. You may make more money than savings on the interest. Therefore, check the benefits of keeping a loan from a different perspective before the prepayment.
In the End
To sum up, you should ask about the prepayment fee before applying for a loan. It will save you from unnecessary charges in the future if you have the resources for early repayment. However, it is not the ideal solution since the money can return more value on investment than prepayment.