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Many people take personal loans when they are unable to arrange funds in the short term. But the same people are capable of getting the required amount after some time. So personal loans do help these people bridge the time gap.
So when these people actually have enough money to clear off the loans, does it make sense to go and do just that?
The answer depends on 2 important factors:
1. When you want to pre-close a personal loan, lenders might charge a prepayment penalty. So how much is the prepayment charge (generally a percentage of outstanding amount) will help you decide whether to pre-close or not.
2. Now most loans are structured in a way that they start charging interest first and principal later. So if you have taken a personal loan of tenure 2 years and you can pay the entire sum back after just 4 months, then you can save a lot in terms of the interest. However, if you are nearing the end of the loan tenure, pre-closing the loan might not make much financial sense. It is because you would have already paid most of the interest. The remainder principal would be in any case have to be repaid with time.
Now these are mathematical factors. But having a clear zero-loan life gives you peace of mind that cannot be calculated by financial mathematics.
So if you have surplus money available with you and which can be used to prepay a part or full personal loan, think of it in two stages. First do the math as explained in above two factors. Once it’s clear that prepaying makes sense mathematically, just go and do it. But if mathematics says that there is no great benefit of prepayment, then ask yourself as to what holds higher priority for you – saving money or peach of mind. Your answer will help you take the decision.
Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.