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These tips must be taken into consideration before prepaying the loan
Posted on: 23/Jun/2018 10:02:03 AM
It is known that many of us take loans to meet our requirements. These requirements vary from one person to another person. While few take loans for buying their house others take loans for buying cars or for sending their kids abroad etc. Sometimes the persons who have borrowed money would think about prepaying their loans when they have got surplus money with them.
The tips mentioned must be considered before prepaying the loans.
Do not disturb your emergency fund:
To prepay the present loan do not disturb the emergency fund. It is worthy to note that emergency funds would be useful for us in the times of emergency like job loss, accidents or severe illness etc. We must make sure that we have got enough savings to maintain liquidity in our finances. This must be given a thought before we prepay our loans. It is necessary that we must maintain emergency funds 3 to 6 times our monthly expenses.
Evaluate the opportunity cost of not investing:
Only when we have got surplus money we think about prepaying our loans. These surplus funds would be due to investment getting matured or it could be due to bonus or promotions etc. It is now said that these surplus funds could be invested in fixed deposit or in a mutual fund so that our financial goal could be achieved in the future. Evaluating the opportunity cost of not investing could be carried out by calculating the expected returns on the investment that we have to sacrifice when we prepay the loans. It is important to note that the surplus funds could be used to prepay loans when interest amount being saved through prepayment is higher than the returns foregone by not investing.
Repaying of other loans also must be given a thought:
Some persons would have taken multiple loans also. In that case they must consider repaying other loans also. For example a person would have taken both personal as well as car loans at different interest rates for the same number of years. EMI savings of personal as well as car loans must be taken into consideration and whichever is higher must be paid first. It would be better to continue with our investment if the returns earned on current investment are higher than the cost of our most expensive loan.
Prepayment charges must be given importance:
While considering loan prepayment it is essential to consider prepayment charges that a lender levies on the borrowers. It must be noted that floating rate loans do not involve any prepayment penalty whereas the lenders charge this for fixed rate loans. Do not ignore the prepayment charges as it might offset your savings on payment of interest.
Prepay the loan as early as possible:
More interest could be saved by us when we prepay the loan as early as possible. Prepaying the loan could be done in the early stages of the loan as greater savings on the total interest payout would be possible. Borrower would be able to save more interest plus reduce the loan tenure when prepaying during the early stages is done.
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