Personal Loan Prepayment: From Charges to Benefits
Our finances in this 21st century are based on our ability to access credit, personal loans are one of the most used credit products today. Personal loans can prove helpful in settling urgent expenses such as home improvements, vacations e.t.c.
Since our ability to access credit almost everywhere, especially when need dictates our financial life, the easiest way to access loans is the payday loan app.
When accessing personal loans, most individuals only consider the interest rate but it is also important to watch out for the personal loan prepayment plan.
So What Exactly Is Personal Loan Prepayment?
Personal Loans are very helpful in bridging the gap during emergency expenditure. These loans come in cash and very fast if you use the easy loan app for borrowing, and these funds can be very useful in undergoing an urgent home improvement, planning an event e.t.c. Personal loans are mostly unsecured hence they are characterized by high-interest rates.
Advantages Of Personal Loan
- Helps Debtors Build Credit. Personal loans can help build one’s credit. Accessing personal loans and paying back on time helps build credit since payment history makes up 35% of our credit score.
- Consolidation Of Debt. Personal loans can be used to consolidate (pay off) credit cards and other loans.
- No Need For Collateral. Most personal loans do not need collateral, hence that is while they are characterized by high-interest rates.
- Can Be Used For Almost Everything. Personal loans can be used for any emergency ranging from home improvements to car repair to vacations to wedding
What Is Personal Loan Prepayment?
Personal loan prepayment is used when an individual pays off his loans in full or partially before the elapse of the loan term as described by the loan contract.
Clearing debts before the finish of the repayment might bring peace of mind to an individual, but is it always a clever and economical idea?
Let’s consider some of the advantages of personal loan prepayment
Advantages of Personal Loan Prepayment
- Helps Minimize Interest. Personal loans are characterized by a high-interest rate due to the loan being unsecured, so personal loan prepayment helps in minimizing the amount paid as interest on the loan.
- Becoming Debt Free. Personal loans do actually bridge gaps during urgent situations but if not handled well, it may prove dangerous. So if you access personal loans, try as much as possible to pay back when you have extra cash to spare.
- Reduction of Debt Burden. Personal loans can also be prepaid in part if you do not have the complete money to spare at that certain time. Personal loan prepayment in part helps to lessen the amount of burden the loan exerts on an individual.
Types of Personal Loan Prepayment
Personal loan prepayment is basically of two types:
- Full prepayment
- Part prepayment
Full Prepayment
Full prepayment of personal loans refers to settling the total amount owed before the repayment window elapses. This does not only makes one free of debt but it also ensures peace of mind. Personal loans prepayment can be done in full early in the loan term to save a lot of money on interest. A personal loan has a lockup time of about one year after that the debt can be paid in full.
Understanding Full Prepayment
For example, if Jake takes a personal loan of $40,000 for a time of 3 years at an interest of 15%, with a monthly EMI ( Equated Monthly Installment ) of $1,500. By the end of the loan time, Jake would have paid $54,000, meaning that the amount paid toward interest is $14,000
| YEAR | PRINCIPAL | INTEREST | PERCENTAGE OF TOTAL INTEREST COST | INTEREST SAVINGS |
| 1 | 10774 | 7224
| 51.6% | Locked in period |
| 2 | 12890 | 5110 | 36.5% | 48% |
| 3 | 16334 | 1666 | 11.9% | 11% |
During the locked-in time, the lender makes up to 50% of the Interest so that if the debtor chooses to opt for prepayment after the lock-in time, the lender must get at least half of the interest.
The total saving on prepayment of a personal loan relies on an important factor called Prepayment Penalty.
A prepayment penalty is collected by the lender in cases of termination of the loan before loan tenure expires. Prepayment penalty varies from one lender to another.
Part Prepayment
Part prepayment is when an individual makes a partial repayment of an accessed loan.
Part prepayment reduces the amount owed thereby reducing the amount that will be paid as interest. Part prepayment can be done when the individual’s spare money is not enough for a full prepayment.
Understanding Part Prepayment
From the above example, we see that the individual has already paid $10774 during the lock-in time, hence is unpaid debt is $29226. If the individual makes part prepayment of $10000, the debt reduces to $19226. Personal loans interest is built on the outstanding principal amount, a reduction in this outstanding `principal amount is as much as a reduction in interest.
What To Choose In Which Situation
Both types of personal loans prepayment are important and very good.
Personal loans prepayment plan are to be made depending on the situation of the individual in question, if the individual has enough spare money to clear the debt, let the individual do so.
But if the individual doesn’t have all the funds to clear the loan, such individual should try as much as possible to reduce the outstanding principal amount.
Effect of Personal Loan Prepayment on Credit Score
All forms of loan and action taken during the loan period influences our credit score. Personal loan prepayment does not have an instant action on our credit score, but during a review, it should prompt repayment of debt thereby increasing our payment history which makes up 35% of our credit score.
Personal Loan Prepayment is very important in staying above personal loans due to the outrageous interest rate.
https://www.forbes.com/advisor/personal-loans/personal-loan-debt-statistics-during-the-pandemic/
