Is it Advisable to Repay Your Loan Early?

marzo 30, 2022
10:35 pm
por Yamna Zafar

Is it Advisable to Repay Your Loan Early? I recently discussed with a friend whether or not she ought to pay off her loan early. She was curious about the advantages of paying off her personal loan early, as she had just received approval for the line of credit.

The answer to this question depends on a number of variables, including the amount you owe on your personal loan, the interest rate you’re paying on it, when your term ends (and, consequently, when any prepayment penalties would become due), and any penalties you might incur if you unintentionally made an early payment. Theoretically, if all loans were created equally, paying off debt before it’s due would always be preferable to delaying repayment due to interest. But in reality, depending on your unique circumstances, even little variations in these factors could make one choice preferable to another. In order to determine whether it makes sense for you to pay off a personal loan early, let’s examine each aspect separately:

The Amount Of Your Loan's Interest

La parte de tu préstamo que debes devolver al prestamista como compensación por utilizar sus fondos se llama tasa de interés. Dependiendo de si se te cobra una vez al año o mensualmente, esto podría ser un porcentaje o una tasa anual. Cuanto más debas en tu préstamo, mayor será la tasa de interés.

La tasa porcentual anual (APR) no es el factor más crucial al decidir si vale la pena pagar un préstamo anticipadamente; más bien, tu tasa de interés individual lo es. Aunque puede ser tentador, evita el error de aprender el APR y compararlo con otros préstamos. No asumas que algo es mejor solo porque es más barato en un 1%, por ejemplo, si una hipoteca a 30 años tiene un APR del 8% y otra a 30 años tiene un 7%. La misma regla se aplica si dos préstamos tienen APR diferentes: que uno tenga un APR más alto no necesariamente significa que sus términos sean peores que los ofrecidos por su competidor.

Prepayment Penalties' Cost

Prepayment penalties are one of the main justifications for early loan payback. Unfortunately, lenders have the right to impose these penalties if you repay your loan early, and they are frequently very high (the typical penalty is close to 1% of the outstanding sum). There are ways to avoid paying these fees, though.

Determine the interest rate you are paying on your debt first in order to determine how much it will cost you to prepay your loan. If the terms are clearly specified in writing, this can be simple; if not, contact your bank to find out how much interest they charge on loans with balances comparable to yours.

Next, calculate the number of months before repayment would be due under normal circumstances. This number might not exactly correspond to when payments are due each year (for example, a 12-month personal loan may have ten monthly payments). Nevertheless, it provides us with a solid foundation from which to calculate costs later.

Finally, multiply the amount owed by the number of months left before payback is due under normal circumstances. Let’s imagine, for illustration purposes, that my personal loans have a $1,500 total and a 6% interest rate. I’m effectively making an extra payment every two weeks if I want them paid off in a month rather than in four.

Prepayment penalties can be made even with a significant payoff, but it is preferable to avoid them.

Prepayment penalties are recoverable with a sizable payoff, but you are best off avoiding them. The cause? When it comes to personal loans, paying off the debt too quickly will end up costing you more in interest over time than it would have otherwise.

La conclusión final es que pagar un préstamo anticipadamente puede ser ventajoso, pero solo si tienes el dinero para hacerlo y la tasa de interés de tu préstamo no es excesiva. Considera mantener tu préstamo hasta su vencimiento si no tienes el dinero o estás pagando una tasa de interés alta.