A personal loan is an option for the people only during the times of emergency. People tend to go for this loan in unavoidable circumstances because these unsecured loans carry a high rate of interest when compared to other types of loan. To reduce the interest that is paid to personal loans, many think of prepaying the loan with the idle funds. Is it a viable option? Should you consider going for the prepayment of the cash loan? You should carefully analyze the implication of prepayment of the loan in terms of interest saved and an opportunity missed. Here is a list of factors that you should look in while considering prepayment of the loan.
Points To Consider While Repaying Personal Loan
Interest on the unsecured personal loan is high when compared to another loan available in the market. If you don’t have any credit card loan in your debt portfolio (which carries the highest rate of interest), it is a good idea to prepay the loan with the idle funds to reduce a rate of interest you pay for the loan. Preferring to prepay loans like home loans and educational loans over personal loan will make you lose tax exemptions and affects your savings in the long term.
Apart from the rate of interest you pay for the loan, you should look at the loan tenure. Initial EMIs that you pay for any type of loan are contributed to the interest element. Considering prepayment of the cash loan in the later stages is not advisable as the only principal amount is left for repayment. If you are handling car loan which in the initial stages, it is a good idea to prepay this loan over the personal loan though it has a lower rate of interest.
Everybody will have good intentions while repaying the loan. While choosing the type of loan you want to prepay first, you should consequence of defaulting the loan. If you default personal loan, your credit score will be affected, in the case of a car loan, the lender has right to repossess the car. In the case of a home loan, extended default period may be a cause of concern.
The most important thing that one should consider in prepaying the personal loan is an investment opportunity. If you are paying 16% interest on the personal loan and if there is an investment opportunity that gains you the income of 20%, it is not advisable to prepay the quick loan. You can rather use the idle funds to invest in the opportunity that generates more income.