Are you in a rush to get debt-free by repaying your personal loan early? Everything has a cost. What’s the cost of repaying a loan earlier than the agreed date? ⭐Personal Loan ⭐Debt Management
Personal loans are one of the most popular forms of borrowing in the UK after credit cards. Due to the ease of borrowing, a lot of people tend to take out a personal loan to help cover their unexpected expenses. As lenders generally offer a borrowing range of £1000 to £50,000, many people borrow a huge sum of money as well. A borrower can spread the cost of repayment over 7 years – that is the maximum loan duration you can opt for. Longer repayment periods may often feel like a burden stretched too far. For this reason, sometimes, we feel tempted to repay the loan earlier than the agreed date.
However, before you decide to repay your loan early, it is important to gauge your financial goals. Here are 3 do’s and 2 don’ts to take into account if you are considering to repay your personal loan early.
1. Do have a plan for the money
Do you have a plan for the extra money that you will be needing to pay off your debt? Repaying the entire loan will certainly make you feel good. But not having enough money to repay the debt may cause you a lot of stress. If you are thinking of using your savings for the repayment, ensure that after you are done, there must be something left in your saving pot. We usually save money for a specific goal or emergencies. So, do not drain out the entire savings as you may need it soon.
2. Do contact your lender
Let your lender know that you intend to pay off the debt early. Read the Terms & Conditions of the loan thoroughly. Some lenders do not allow early repayment of the loan while some may allow with an additional cost. To be on the safer side, you need to understand the agreement that you had signed with the lender at the time of borrowing a personal loan. If you have to pay an additional cost (early repayment fee), then you should recalculate your budget. Know the exact amount that you need to pay to close your debt. Contacting the lender will help you avoid uncertainty and the lender will also be able to factor in the amount that you have to pay.
3. Do have a monthly budget prepared
After making the repayment, you should have enough funds for your monthly expenses. Housing, utilities, and groceries are a few essential expenses that cannot be avoided at any cost. Moreover, you also have to keep aside money for any other loan repayment (if any). Falling behind on the repayments may damage your credit score. Making an early repayment needs you to be prepared financially so that you do not end up creating more trouble for yourself.
4. Don’t use your retirement fund
This is one of the biggest mistakes we often make while rushing to repay the debt early. We consider using funds from the retirement pot. But there can be consequences when you cash out some of your funds. Mostly, retirement funds have an age criterion for making withdrawals. You may have to pay a hefty amount if you cash out the fund earlier. Also, a retirement account has a higher rate of return that you could be losing if you withdraw it. Pausing your retirement contribution to repay a personal loan is not a feasible solution. Don’t rob your future self to become free from debt.
5. Don’t close it if you’re near the end of the term
There can be two possible reasons for early loan repayment. First, you don’t want to pay interest on the loan anymore. Second, you want to become debt-free as soon as possible and by all means possible. So, if you only have a few payments left, you will not save a lot of amount on interest if you close it. Consider closing your loan if you still have a long way to go. Or else, keep making the remaining repayments on time as it will help to improve your credit score.
What is the cost of repaying a personal loan early?
According to Consumer Credit (Early Settlement) Regulations 2004:
- Lenders can charge up to 28 days interest if you have less than 12 months left for the loan term to be completed.
- Lenders can add an extra 30 days or 1 calendar month if you have more than 1 year left for the loan term to be completed.
That means your lender is allowed to charge you for compensating the incurred costs as a result of early settlement. Depending on the terms and conditions of the lender with who you take the loan, you could be charged the equivalent of one or two months’ interest. The earlier you choose to repay the loan, the higher the charge is likely to be. That is because debt takes up a greater part of your loan payments in the early phases of the deal. When you decide to cancel your debt in the middle of the contract, the balance could be very large. But it will also not be as high as the total interest you will have to pay for sticking to the repayment schedule.
Why do lenders charge an early repayment fee?
When you a take a loan from the lender, they’re budgeting on you to incur interest for the whole duration of the contract. Some portion of the amount that you would have paid in interest will be lost if you repay the loan early.
It can be said that early repayment charges are compensation for the loan providers. On the flip side, a lot of people do not consider repaying the loan early due to the charges associated with it.
How will I know how much amount I have to pay?
When you request your lender for an early settlement, your lender will send you a detailed statement that contains:
- The amount you owe
- The total amount that you have to pay to settle your loan early
- The date by which you are required to make the payment
- The reduction in the total amount of interest (if applies)
- Any other charges
Now that you know all about repaying a personal loan early, you may be ready to move on. The entire process may sound as simple as sending extra money. However, a little slip may result in the wrong financial turn. Be sure you understand the terms of your loan and get in touch with your loan provider. Ask them how to proceed and discuss the complete breakup of the amount so that you know exactly how much you are expected to pay. And if you are still having arguments inside your head to repay early or not – consider talking to an expert.