Whenever we take out a loan, we often look forward to closing it as early as possible. And why not? Everyone wishes to have a debt-free life, right? Closing your loan early can save you money on interest payments and free you from debt sooner. However, it is important for you to understand the process and major consequences you may face before making a decision. So, here we are with a brief guide for you. In this article, we would help you understand everything you need to know about closing your loan early, ranging from pre-closure charges to benefits.
Reasons You Should Close Your Loan Early
Pre-closure of loans can offer you several advantages:
- Helps you save money as paying off your loan early reduces the total interest you would be paying over time.
- Brings financial freedom as being debt-free sooner gives you more flexibility with your finances.
- Pre-closure of loans can positively impact your credit score
- Provides you with peace of mind as a debt-free life can relieve stress and provide a sense of accomplishment.
How To Close Your Loan Early
There are several strategies you can use to pay off your personal loan, car loan, etc. as early as possible. Here are some significant ways to do so:
Make Extra Payments
Make part pre-payments towards your loan whenever possible as it would reduce the overall outstanding loan amount
Lump Sum Payment
If you get a tax refund or bonus, make sure to make a large lump sum payment towards your loan
Refinance Your Loan
You can also consider refinancing to a shorter-term loan with lower interest rates if you qualify.
Benefits of Making Extra Payments
Making extra payments towards your loan has several benefits:
- Paying extra lowers the principal balance, and this results in less interest over time.
- By paying more than the minimum amount, you can shorten the duration of your loan.
- If you regularly make extra payments, then you can cultivate disciplined financial habits.
- Depending on your situation, you may be eligible for tax deductions on mortgage interest.
Recommended: Should I Prepay a Short-Term Loan?
Things to Consider Before Closing Your Loan Early
Before you decide to pay off your loan early, consider the following factors:
- Emergency Fund: Ensure you have an adequate emergency fund before allocating extra funds towards loan payments.
- Other Debt: Evaluate whether paying off your loan is the best use of your extra funds compared to other high-interest debts.
- Opportunity Cost: Assess whether investing the extra money elsewhere would yield higher returns than paying off the loan early.
- Pre-closure Charges: Confirm whether your loan agreement has any pre-closure charges for early repayment.
- Future Goals: Do consider how paying off the loan aligns with your long-term financial goals.
Steps to Close Your Loan Early
Follow these steps to close your loan early:
- Review Loan Terms: Familiarise yourself with the terms of your loan including the outstanding balance, interest rate, and any prepayment penalties.
- Determine Extra Payment Amount: Calculate how much extra you can afford to pay towards your loan each month.
- Contact Lender: Inform your lender of your intention to make extra payments or pay off the loan early. Confirm the process for submitting additional payments.
- Track Progress: Monitor your loan balance regularly to track the impact of your extra payments.
Also Read: 6 Dos and Don’ts While Applying for an Instant Loan
Conclusion
Closing your loan early can definitely offer benefits such as saving money on interest and achieving debt-free status sooner. However, as mentioned earlier, you should be aware of all prepayment penalties or preclosure charges before making a decision. You should also consider your future goals before deciding to pay off your loan in advance.
FAQs
1. What are the benefits of closing my loan early?
There are several benefits of early loan closure. Closing your loan early can help you save money on interest, get out of debt sooner, and improve your credit score. Also, it gives you peace of mind knowing you do not have to worry about loan payments anymore.
2. What are some strategies to pay off my loan early?
To pay off your loan early, you can make extra payments, put any bonus or tax refund toward the loan, or refinance your loan to get a shorter term or lower interest rate.
3. How do extra payments affect my loan?
When you make extra payments toward your loan, you are reducing the principal amount you owe on the loan. This means you would pay less interest overall, and you would be able to finish paying off the loan sooner.
4. Are there any tax benefits to making extra loan payments?
Making extra payments on a home loan can offer you some tax benefits. You can claim deductions on interest under Section 24(b) up to ₹2 lakh per year, and on principal repayment under Section 80C up to ₹1.5 lakh.
