4 Tips To Repay Your Personal Loan Early
There’s nothing quite like the feeling you get when the funds from your personal loan fall into your bank account. Seeing those numbers go up is a pretty freeing feeling.
However, there’s a whole new shock to the system when you make your first payment on your loan. That part isn't so fun.
What’s also not so fun is looking at how long it’s going to take you to pay off your loan. When you’re wanting to just hammer down your personal loan debt, it’s easy to just start putting all your extra money towards it.
However, while it may be tempting to wrap up your payments a few months early, you need to first check that you have all your financial bases covered.
Before you dip into your savings to pay down your personal loan, you need to double check your financial health to ensure that’s the right move.
Here are 4 tips to ensure you can repay your personal loan early… without causing damage in the long run.
The truth is, if you want to survive, you need to pay for food and shelter. Your monthly expenses, like your groceries, rent, and utilities take priority when it comes to managing your finances.
You should also consider that paying down debts like student loans and credit cards are essential expenses as well.
If you owe money, those are fixed expenses every month. You should consider those just as much “survival expenses” as food and shelter.
Skipping debt payments every now and then may be tempting, but it’s a habit you don’t want to develop. Even if one of your lenders lets you skip a payment here and there, and it won’t hurt your credit score, you shouldn’t yield to skip one.
That type of mindset will only harm you and your finances in the long run, as a little compromise every so often can lead to destruction later on.
Rather, you should consider your debt payments equal to paying for your home and groceries. That way, you’ll avoid swirling into a black hole of debt that’s impossible to escape.
Before you start hammering down your personal loan payments, you should ensure you have a safety net of savings set aside. You could consider this safety net your “emergency fund”.
The truth is, emergencies happen to everyone. And they always come at a time you least expect. No one is thinking about the day their car breaks down, they lose their job, or a loved one passes and funeral expenses need to be covered.
Unfortunately, living without a safety net of savings will ultimately make those tough moments in life that much worse, as your problem multiplies into a hopeless situation.
Rather than leaving yourself vulnerable to this kind of situation, get prepared now.
Your savings are there to protect you from those worst-case scenarios. So how much should you save for a rainy day?
The rule of thumb is to have six months worth of monthly expenses saved away. Sometimes, people lose their job for a few weeks or few months before finding a new one. You need to have enough locked away to protect you and your family from running out of money.
While six months may seem like a lot of money, it’s possible to get there. The key is to start small. Start by saving $1000. Then, focus on saving one month’s living expenses.
Then aim for 3 months. Then 6. Before you know it, you’ll have a safety net that’s guaranteed to keep you protected when the storm comes. And the reality is, it’s not whether the storm will come or not; it’s when. Be prepared. You’ll thank yourself later.
Personal loans usually have annual percentage rates (APRs) between 6% and 36%. If your retirement fund has a rate of return that’s higher than your loan’s APR, then you may want to consider dividing extra payments you receive between your retirement fund and paying down debt.
Your main goal should be to pay down high-interest debt before funneling your extra cash into your retirement fund. This makes mathematical sense. If your retirement fund receives an 8% return, but you have credit cards with 20% interest, then you should pay off the credit card first.
However, if you have low-interest debt, that’s charging you 5% interest, while your retirement fund is gaining 8% interest, then it’s best to split payments between the two.
If you’re dealing with a lot of debt, it’s easy to get tempted to use your retirement fund to pay it off. Try to avoid this at all costs.
Rather, use the extra cash from your monthly income to hammer down debt. If that’s challenging, then work a bit more, and cut back on monthly luxuries so you have something to lessen the debt.
There are very few personal loan lenders who will charge you a penalty if you pay off your loan early. However, some do. It’s important to check if your loan agreement includes this penalty, known as a prepayment fee.
Some lenders put these fees in place to ensure they make the most money off your loan. The truth is, the longer you have to pay off a loan, the more money they’ll make in interest off you.
If your loan doesn’t have a prepayment fee, then go to town on paying it off early. However, if your loan comes with a prepayment fee, you should calculate whether you’ll save more by paying it down or waiting.
Check if the interest you’ll pay for the remaining months is higher than the fee.If you only have a couple payments left that will save you $100 in interest, but you will be charged a $500 prepayment fee for paying off your loan early, then it’s best to wait. Instead, save your extra money or put it towards a retirement fund.
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