The best way to pay off a personal loan is by putting a lot of money into payment towards the principal by payment of extra every month or by making biweekly payments instead of monthly payments. It is a great move to pay off a personal loan as it will reduce a major financial burden to the borrower.
Why is it good to pay off a personal loan early?
In many situations it is a good idea to pay off your personal loan early. Although the early payoff is good, it has other downsides as well. If you have a high amount of loan then paying off the loan may be a burden as cash rotation will be challenging. If you have arranged funds and are ready to pay off then it will not be burdensome.
By paying off your personal loan early you are reducing your debt and thereby improving your credit score which will help you to have good chances of getting more loan offers with lesser interest options.
Before you plan for paying off a loan find out about the prepayment penalties which are levied by the lender. Also check your monthly cash flow and your budget if it will suffice after loan payoff.
How to pay off a personal loan faster?
You can pay off a personal loan in different ways and some of them have been discussed here.
- Biweekly prepayments
- Extra payment method
- Monthly budgeting
- Refinancing
- Biweekly payments
It is suggested that you start making biweekly payments towards the loan balance instead of monthly payments. It is a kind of strategy that will help you cut down on loan repayment tenure. This will have an impact on your loan tenure and you will not feel a burden of repayment.
- Extra payment method
This is a simple way of repayment where you can pay debt faster even if there are any irregular payments. If you received any gifted money or any awarded money you can put that amount towards payment. Since this is a one time payment you can request the lender for making the extra payment and by doing so you can reduce your loan amount.
Click here for When Are Personal Loans a Good Idea?
- Monthly Budgeting
Look around the ways you can reduce the loan amount. By reviewing the monthly budget and finding out ways so that you can pull the extra money out and cut down some unnecessary expenses so that you can bring together some money to partially pay off the loan. By cutting down money towards other things you can reduce the amount of personal loan faster.
Modern technology has enabled modern solutions like the budgeting app. For those who do not have the practice of budgeting they can use the budgeting app and get the best results. By regularly reviewing the budget you can find out where the money is going towards and how you can curb it. The budgeting app will help you to develop the strategy of saving money and allow you to put money towards your loan payoff.
Click here for How to implement the Envelope Budgeting Method?
- Refinancing
Refinancing means financing again typically with a lower rate of interest. When you consider refinancing your personal loan it is a good idea but you should do it only if you get a lower interest rate than you already have. When you refinance at a higher rate or extend your repayment plan to reduced monthly payments you can easily wind up by paying more in interest and for a longer period than you require.
The interest rates are higher today compared to past few years. If you have a good credit score then you can qualify for lesser interest rates provided your debt is low and income is high.
Advantages and disadvantages paying personal loan faster
The main advantage of paying off a personal loan early is the interest saving and however there are some disadvantages as well.
Advantages of paying personal loan faster
- Reducing your financial stress- You can get peace of mind by reducing your debt faster through repayment of loan
- Come out of debt quickly- Making extra loan payments can reduce your debt and also the number of installments
- Pay lesser interest- When you payoff loan quickly you will avoid paying high interest on the loan tenure
Disadvantages of paying personal loan faster
- Effect on credit score temporarily- Once you prepay a loan it will reduce the duration of loan installment payments and it will reduce credit score. However this impact is minimal, it is just temporary and it will change over a period of time. Once you pay off the loan it will have its advantage on the credit score.
- Possibility of prepayment penalty- Lenders charge prepayment penalty for making the loan payments quickly. The prepayment penalty is different from lender to lender. It is advised to check with the lender prior to making the payment.
- Opportunity cost- If you spend all your salaried income on loan payments then you will lose the opportunity of spending money on your desires and wishes.
Take away
One of the best ways to pay off personal loans is through lump sum payment but this may not be suitable for all the borrowers. A biweekly payment instead of monthly payment will reduce the personal loan stress and there is also one more method by which you can pay off faster is through paying higher than minimum payment. Paying off a personal loan always has its benefits like reduced financial stress, saving money and getting out of debt quickly.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
