Personal Loans Is Early Repayment A Good Use For Spare Cash

Personal Loans : is​ Early Repayment a​ Good Use for Spare Cash?
Reducing your overall debt level as​ much as​ possible is​ always a​ good idea,​ and is​ usually recommended as​ part of​ a​ budgeting plan .​
If you​ have some spare funds available,​ you​ might be tempted to​ clear your personal loan,​ as​ nearly all loan plans allow for full repayment before the​ term is​ over .​
However,​ there are a​ few things to​ bear in​ mind before deciding whether paying off your loan is​ the​ best use of​ your spare cash.
Firstly,​ loan providers make their profits by charging interest,​ and if​ you​ clear your loan early then you​ won't be paying the​ lender as​ much interest as​ you​ would if​ your loan went to​ its full term .​
Obviously,​ this means they will make less profit out of​ you,​ and so many lenders will write an​ early repayment penalty into the​ loan agreement to​ make sure that the​ arrangement is​ still profitable for them if​ you​ repay early.
This repayment penalty,​ also known as​ a​ redemption charge or​ a​ settlement fee,​ will often calculated as​ a​ percentage of​ the​ outstanding balance at​ the​ time you​ clear your loan,​ and depending on​ how early on​ in​ the​ repayment schedule you​ are,​ this could work out at​ quite a​ substantial amount .​
Check your credit agreement small print to​ see how much you​ could be charged,​ and see if​ this makes the​ prospect of​ early repayment quite as​ attractive.
If the​ fee is​ substantial,​ you​ could be better off by putting your spare funds to​ another more cost-effective use.
Most credit cards and other kinds of​ debt will charge a​ higher rate of​ interest than a​ personal loan,​ and so concentrating on​ reducing these first may be a​ better use for your money .​
By clearing your higher-interest debts first,​ your spare cash will be having the​ most beneficial effect.
Even if​ you​ don't have another debt to​ clear,​ you​ may find that there's a​ better way to​ use surplus cash than paying off a​ loan that features a​ high settlement fee .​
Investing in​ a​ high interest savings account or​ bond over the​ remaining term of​ your loan may earn you​ more in​ interest than the​ cost of​ a​ redemption charge,​ but when calculating this be sure to​ take account any taxes you'll have to​ pay on​ your investment return.
Finally,​ don't underestimate the​ importance of​ having a​ little money in​ reserve .​
If clearing your loan would leave you​ with very little spare cash,​ then an​ unexpected expense could push you​ back into the​ red .​
If this would mean you​ had to​ take out a​ new loan,​ then a​ new deal may work out to​ be more expensive than keeping your current loan to​ its original term.
To sum it​ up,​ paying off your loan is​ a​ commendable aim and to​ be recommended,​ but before you​ do so make sure that any settlement fee doesn't make early repayment uneconomical,​ that you​ couldn't better use the​ money to​ reduce more expensive debts,​ and that by clearing your personal loan you​ won't be leaving yourself too short of​ money and in​ danger of​ going back into the​ red.
Personal Loans Is Early Repayment A Good Use For Spare Cash Personal Loans Is Early Repayment A Good Use For Spare Cash Reviewed by Henda Yesti on August 12, 2018 Rating: 5

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