It’s tempting to wrap up all your payments a few months early when you’re nearing the end of your long personal loan. But before you drain your savings or use your cash to pay off the loan amount, it’s crucial that you cover your other financial obligations. Once you understand your financial goals, managing your loan becomes easier.
Keep these points in mind if you want to clear your loan payments early:
– Make your monthly expenses your first priority
– Things like groceries, rent, utilities, and other such monthly expenses are what you need to live. But don’t forget debts like student loans and credit cards, which are important payments you can’t skip. These are your fixed payments and a part of your living expenses that you cannot avoid.
– Don’t risk losing your home or car in service of making extra payments towards your unsecured loan. Skipping a debt payment towards your mortgages and auto loans can turn into a bad habit. Even if it doesn’t hurt your credit score and the lender allows you to skip a payment, it’s recommended that you don’t develop this habit.
Have Savings Set Aside
Prioritize a safety net before extra loan payments to stay financially secure if any surprise expense comes up. Your savings can help you in worst-case scenarios, like a medical emergency, home repair, or losing your job. It is recommended that you keep about three to six months’ expenses on hand.
However, if you want to take a small amount to pay off your loan, that should be fine. Avoid taking out huge sums of money so that you’re not left vulnerable.
Check if Your Loan Comes with Prepayment Fees
Some lenders might charge you a fee for paying off your loan early. This is called a prepayment fee. This fee ensures that your lender makes money off your loan, even if you end up saving on interest by clearing your payments early. If your loan comes with a prepayment fee, it is advised to calculate your interest and compare it to the fee. If the fee is only a few dollars, you can clear your debts. However, if the fee is high, then it’s better to make your payments on a monthly basis.