One of the perks of taking out a personal loan is that you do have the option to settle your debt earlier than the scheduled date stated in your loan agreement. Whether you choose to pay a little more every month towards settling your debt, or suddenly have a lump sum available that you would like to pay towards the loan, repaying your loan early is an option.
However, it is important to read your loan agreement carefully before taking this option. Some loan providers may penalise you for settling your debt early. It may seem a little strange that a lender would take this approach. After all, doesn’t settling your debt early benefit the loan provider?
Interest Charges Are Costly
The way that a financial institution, bank or other types of lending providers make their money is by charging you interest and other fees. These charges are spread across the entire term of the loan. The term of the loan is the period over which the loan will be repaid in instalments. The longer the term of the loan, the more you will be paying in interest and other charges and the more money the lender will be making in providing you with a loan.
So if you pay your loan off early, the loan provider will make less money and in order to prevent this from happening, they institute an early settlement or repayment penalty clause as part of the loan agreement. This does not, however, mean that it isn’t a good option.
Check The Penalties
In many cases, the penalty will not exceed the amount of interest that you would have been paying over the full term anyway and getting rid of your debt as early on as possible is always the best option. If you settle your debt very early on in the repayment period, you may even make a saving as the penalty could be lower than the interest that you would have paid over the entire term. This is the ideal scenario for settling your debt early.
It is important to keep the interest in mind when taking out the loan and selecting a repayment term. Pay as much as you can possibly afford every month over the shortest period possible in order to get the greatest savings. A shorter term also means that you are unlikely to need to settle the loan early on.
This said, personal loans generally only provide short terms. Normally, this type of loan would have a repayment period of about 2 to 5 years unlike vehicle finance or a home mortgage which have much longer terms. It is best to choose a loan provider that provides flexible terms and does not dictate the repayment period. In other words, you can choose a repayment period that suits you.
Last but not least, it is important to compare the interest as well as other charges offered by various loan providers in order to get the best financing solution. The lower the interest and the shorter the term, the more you will save on a personal loan in the long run.
If you’re looking for a flexible personal loan from a trusted non-bank lender look no further than LoanONE.
Visit our application page and see if you qualify today.
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