Best Ways to Pay Off Personal Loan Faster and Save on Interest

While it's true that a Personal Loan can help you get out of a financially difficult situation, you may find yourself dealing with a bigger problem if you don’t plan repayment wisely. Personal loans tend to have a higher interest rate than car or home loans, which requires you to pay a higher amount over the loan’s tenure. 

Faster loan repayment not only helps you free your monthly budget from EMI and enjoy financial freedom, but also saves on the total interest you pay. Here are the best ways to pay off loans faster.

How to Clear Loan Fast?

Here are some practical and tried-and-true ways to pay off a personal loan faster and save on interest:

1. Overpay or Make Extra Payments

For the first few months, a large portion of your EMI goes towards the principal amount rather than the interest. This happens because your interest rate is calculated on the outstanding principal amount.

Suppose you can pay a monthly EMI of up to ₹30,000. However, your actual EMI is ₹26,654, which means you are left with extra ₹3,346. Paying this extra amount over your EMI is called part-prepayment, which goes towards the principal amount. 

Since you are making a payment towards the principal amount, your total interest is reduced, which helps you in faster loan repayment.

2. Refinance Your Existing Loan for Debt Consolidation

Personal loan interest rates are higher in themselves as compared to home or car loans. The interest rate the lender offers you, however, depends on your credit profile. Since you are already repaying a personal loan, your credit score must have improved. This improved credit score can help you get a debt consolidation loan at a lower interest rate.

Here is how a refinancing or Personal Loan balance transfer works:

• You pay lower EMIs
• Or, you can maintain the same EMI and shorten the tenure.
• You save more in the long term.
• Reduce the burden by settling multiple loans or credit card debt 

It is worth noting that some lenders may impose premature closing charges, switching costs or prepayment penalties. You must always take these interest costs and charges into account as they affect the total interest payable.

3. Use Your Bonuses, Gifts, and Side Income for Additional Loan Payments

You can also divert your salary bonuses, gifts, and income through side gigs towards loan repayment. Rather than using this amount immediately, you can use it to make part-payments. This will reduce your loan balance and your interest load, helping you pay off the personal loan early.

4. Opt for a Shorter  Tenure if Your Monthly Budget Allows

You have an option to choose from the different tenures offered. You must choose the tenure wisely because it directly influences the total payable interest. A longer tenure provides you with a lower EMI, but the downside is that you pay more interest overall.

Suppose you are applying for a Personal Loan of ₹3 lakh for 3 years. The total interest you will pay over the tenure is ₹58,714. You will pay a total interest of ₹19,855 if you reduce the tenure. The key benefit of choosing a short tenure is that you not only pay less interest but also enjoy faster Personal Loan repayment.

5. Create a Budget and Stick to It

A well-planned budget allows you to track your finances effectively and allocate more towards making part-payments towards the repayment of your loan. Monitoring your earnings and expenditure will help you know how you can curb unnecessary expenses and allocate additional money to your loan repayment.

A budget assists you in making sure you are paying on time and not incurring late fees. It also helps you make extra payments when you can, thereby paying down your outstanding principal more quickly. In the long run, this strategy not only reduces your loan term but also saves you a lot in terms of total interest, which takes you nearer to becoming debt-free.

Why Should You Pay Off Your Personal Loan Quickly?

Here are some benefits of paying off your personal loan early:

You Save Money on Interest

The longer the duration of the loan, the greater the interest you repay. By paying off the Personal Loan faster, you save money on the total interest.

You Free Up Your Income

Faster Personal Loan repayment ensures that you are debt-free and in control of your finances. You can use the leftover funds for savings or investing in mutual funds, or a holiday.

Improved Credit Score

An on-time or early repayment of a loan increases your credit score. You are demonstrating that you handle money responsibly. This allows you to get a loan at more favourable terms.

Reduced Financial Burden

By prepaying debt, you ease the strain on your monthly budget by reducing the monthly regular interest payments. This leaves you with greater discretionary spending in your budget to save, invest, or cover other costs.

Peace of Mind

Being in debt can take a toll on your emotional well-being. Faster personal loan repayment eliminates debt-related anxiety and allows you to pursue other financial goals.

Impact of Tenure and Interest Rate on Total Interest Paid

Tenure and interest rate are two factors that substantially influence the total interest you will pay. Suppose you apply for a Personal Loan of ₹3 lakh at an interest rate of 12% p.a. Here is a comparative analysis of how a longer tenure influences the interest savings:

For a 1-year tenure, you will pay a total interest of ₹19,855. For a 5-year tenure, you will pay a total interest of ₹1,00,400. Between these tenures, you are paying an extra interest of ₹80,545, which is a significant amount.

To Conclude

Personal loans offer a convenient means of getting funds for emergencies or urgent expenses. However, as soon as the money is disbursed, you are obligated to pay the EMI every month over the designated tenure. This obligation can become stressful as well as a fixed part of your monthly budget.

Repaying your loan early is a wise financial decision that will save you on interest, lower your monthly financial commitments, and improve your credit score. It also gives more financial freedom and comfort to concentrate on other valuable objectives, such as savings and investments.

FAQs 

Is there any penalty for paying off a personal loan early?

Many lenders allow part-prepayment or full prepayment without any penalty after a few months. However, some lenders do charge a fee for personal loan prepayment. Please check with your lender before you make a decision.

Does part-prepayment of a Personal Loan reduce EMI or tenure?

Part-prepayment of a Personal Loan can either reduce the EMI or the tenure. If you want to reduce EMI rather than tenure, you must first confirm with your lender before making the part pre-payment.

How to settle a Personal Loan faster?

Follow these tips to settle a personal loan faster:

• Make an extra payment towards the principal
• Increase your EMI 
• Use bonuses or extra income for lump sum payments

Can I repay a Personal Loan from any income source?

Yes, you can use any income source for personal loan repayment, including bonuses, freelancing income, salary or gifts.

Is refinancing a good idea to pay off a Personal Loan faster?

Not always, but refinancing is a good idea to pay off a Personal Loan faster in situations where the interest rate and amount you are paying on the new loan are lower than those of the existing personal loan. You must also consider the pre-payment charges.