How to repay your personal loan faster? (2024)

Personal loans can serve as a useful tool for managing finances. A significant benefit of personal loans is their versatility. Unlike certain loans designated for particular purposes (such as mortgages for homes or auto loans for cars), personal loans can be utilised for nearly anything. This adaptability makes them an excellent choice for addressing unexpected expenses, consolidating debt, or financing planned purchases.

Additionally, personal loans typically feature a quicker and more straightforward application process compared to some other types of loans. This can be particularly beneficial when you require funds urgently for an emergency or time-sensitive expense.

Here are some tactics you can use to pay off your personal loan more quickly and reduce interest costs:

• Make payments larger than the minimum required amount: Every extra contribution helps! Even adding a small amount each month can substantially decrease the total interest paid and shorten the loan repayment period.
• Make payments more frequently than required: Some lenders permit bi-weekly payments. This increases the frequency of your payments throughout the year, thereby expediting the repayment process.
• Make a lump-sum payment or prepay the loan: If you receive extra funds, think about allocating them towards your loan principal. This directly reduces your outstanding balance, resulting in quicker payoff and reduced interest charges.
• Reduce expenses to allocate more funds for loan repayment: Review your budget and pinpoint areas where you can reduce spending. Redirect those savings towards your loan payments to speed up the repayment process.
• Explore refinancing or balance transfer options: If you have a personal loan with a high interest rate, consider refinancing with a different lender that offers a lower rate. This can greatly reduce your interest expenses and shorten the repayment duration.
• Avoid incurring new debt: While you’re paying off your personal loan, refrain from taking on additional debt. Doing so will only amplify your overall financial obligations and hinder your loan repayment progress.

Frequently Asked Questions (FAQs)

Q. What is the pre-closure penalty associated with paying off a personal loan early?

Several banks impose a pre-payment penalty when you settle your loan ahead of schedule. This penalty is typically calculated as a percentage of either the outstanding loan balance or the interest the lender would miss out on due to early repayment. Typically, the pre-payment penalty falls within the range of 2% to 5% of the loan amount. The precise fee may differ among lenders.

Q. What documents are needed for the early repayment of a personal loan?

Several documents must be exchanged between the lender and borrower when closing a loan early. Make sure you possess all these documents as they serve as evidence of your loan repayment.

Documents to be provided to the lender:

• KYC documents
• All pertinent loan documents
• Bank statements showing EMI payments made to date
• Pre-payment statement

Documents to be obtained from the lender:

• Receipt for pre-closure payments
• No objection certificate (NOC) for personal loan closure
• Personal loan closure certificate
• Payment due certificate

Q. Does repaying a loan early have a positive impact on your credit score?

Making consistent on-time payments and paying off a loan early can have a positive effect on your credit score. This showcases responsible credit behaviour and can be advantageous when applying for future loans.

Q. Are there any opportunity costs associated with loan prepayment?

The funds you allocate to prepay your loan could potentially be invested elsewhere, potentially yielding a higher return. Consider the potential interest savings from prepayment in comparison to the potential returns from other investments.

Q. What are the benefits of prepaying your personal loan?

The primary benefit is saving money on interest. By decreasing the outstanding loan balance sooner, you reduce the total interest paid. Additionally, you become debt-free more quickly, freeing up your budget for other objectives and providing peace of mind. Making consistent on-time payments and paying off the loan early can have a positive effect on your credit score.

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Published: 02 Apr 2024, 04:49 PM IST