When a person is under debt or under an obligation to repay a loan, is it a wise choice to pay the whole loan when you have money? Well, most of the people who don't know about banking or how the system of loans would say yes. And why not since it is always better to live a life without any tension or obligation to fulfil. That's where people often make the mistake of clearing their debt before the estimated date. But before we understand that why is it not wise to clear off your loan prior to the date, we have to understand the fact why people usually tend to apply for personal loans.
1) There is no constraint on how you use the money
2) Less paperwork required
3) Unsecured loan means no collateral is required
Since there is an ongoing competition in the banking sector as well, we have to understand the fact that there is a variety of personal loan interest rate we can get from a different bank and depending upon our suitability we can choose a bank to get a loan from and like any other loan we get the amount in our bank account, and we have to pay the loan ( principal + interest ) over a particular period of time.
Now there are two ways of closing a loan:
1) The first one is the conventional way in which we repay the loan by way of paying monthly EMIs on time and closing the loan on the anticipated date. Please take into account that this option does not include any closing fee, and the person is free of the debt.
2) Pre-Closure of the debt. As the term suggest you clear off your debt prior to the end of the tenure. Most of the people do this in order to save themselves from the additional interest that will be applying to them and increasing the amount that shall be paid. Most of the lender allows borrowers to pre-close the loan after 6-12 months. Also, note that the borrower shall pay a pre-closure penalty if they wish to repay the loan before the tenure is over.
Several lending institutions provide this facility such as UCO bank personal loan makes a good case in point when it comes to flexible repayment option.
Now, most of the people have this thing that their credit score is low as they have an ongoing debt on them. Clearly, this is a myth. As a matter of fact, with an ongoing debt and your punctuality to pay the EMI on time generally stabilises your credit score.
This works in the following way:-
Let's say you have an ongoing personal loan. When you make payment in the form of the monthly instalments on time, this information is shared with the credit bureau. The credit bureau records it in your credit report, and when you settle the loan on time, you're provided with an increase in the credit score.
You can see, repaying an ongoing loan on time enhances your credit score in a positively and also improves your credit report. This improves your eligibility for future loans.
Now the most interesting question arises that when shall we go for the pre-closure method. Well, there are two conditions:-
1) The first one being when you have enough money to clear your debt including the pre-closure penalty
2) When you already have a decent credit score as pre-closing your debt won't affect your credit score that much
When you shouldn't foreclose a personal loan:-
1) When you're building your credit history.
2) When the penalty charges are higher than your savings
Conclusion- Well as a matter of fact depending upon the conditions of individual to individual it is considered wise to analyse your situation, and it'll be the best option to invest the extra amount of money in savings rather than pre-closing your loan.
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