Outlook Money
Repaying a personal loan before its completion terms can look like a sound decision. It reduces the debt, saves interest expenses, and releases liquidity. However, it is not an advisable decision always.
One of the major benefits of pre-closing a personal loan is the saving on interest payments. Personal loans have a high interest rate, an early payment reduces the cost of borrowing.
Clearing debts enhances one's creditworthiness as lower outstanding amount impacts credit scores positively.
Prepayment charges are one of the major disadvantages of repaying personal loans. The lenders charge a penalty for paying off the loan in advance to recover their lost interest revenues.
All loans are not calculated equally in terms of interest. When the interest is paid during the initial years in hefty amounts, pre-closing in the latter half of the tenure will not reap whopping benefits.
Pre-closing a loan is recommended in many cases when the time left is considerable and the prepayment penalty is either low or zero. Recipients of windfalls, like bonuses, tax refunds, or inheritances, can pre-close if they cannot find a better investment.