Jayss got some good news today!
Her hard work finally paid off, and she just got a pay raise! But this leaves her in a bit of a dilemma; she doesn’t want to trust her money to fixed deposits as the reduced interest rates mean she won’t be making anything worthwhile in return. Similarly, she isn’t ready to enter the investment world just yet. One line of action that’s attracted her attention, though, is repaying her loans early.
Should she do this?
Short answer, yes. The person’s benefit from such a move will largely depend on the type of loan she’s trying to pay off. It is because different loans come with other terms and are therefore affected differently by early repayments. Here’s what we mean.
What Happens When You Make Early Repayments For Hire Purchase
When you make early repayments for this type of loan, you get to clear your loans earlier and get a rebate on your interest from the financial institution you took out the loan with. It is because these loans’ calculations use a flat interest rate. By extension, the amount you should pay as interest is established from the beginning and doesn’t change the farther you get with your repayments. The higher monthly payments you make go into clearing the principal and the interest simultaneously.
What Happens When You Make Early Repayments For Housing Loans
In this instance, you’ll not only become debt-free earlier, but the higher monthly payments you make will ensure you save on what you’d have paid as interest. The situation is different here because housing loans use the reducing balance method. As a result, the more you reduce the principal amount, the lesser you have to pay on interest.
What To Remember When Settling Loans Early
While the idea of paying off as much of your loan as possible when a new income stream appears is enticing, you should move with caution here. The primary reason is that some loans usually come with a penalty or fee that you must settle if you intend to clear your entire loan early. So, if you’re like Jayss and you’re intent on clearing your debt, you first need to speak with your bank or financial institution to ensure that you completely understand the specifics of your loan terms. Only move forward with your plans if you’re 100% certain that clearing your loan is the more financially prudent option.
Takeaway
Paying off your entire loan when you can is great. It enhances your cash flow and gives you more financial freedom. However, if you can’t afford to do that just yet, there are other great ways to manage your loan and enhance your income stream.
