Ways to pay a loan ahead of time. Advantages and disadvantages
It is possible that while you keep a loan in the financial system, your economic situation changes and you have extra income or savings that allow you to pay it partially or totally ahead of time. Consider these 3 ways of for a loan, and analyze its advantages and disadvantages.
Reduce the term.
Time is the factor that most influences the interests of the loan, so one option is to lower the term to pay in less time. Look at this example:
Amount: $ 10,000
- Term: 5 years (60 months)
- Interest: 10%
- Fee $ 212.47
- Total interest payment: $ 2,748
- Total payment at the end of the loan: $ 12,748
- The partial amount that can be paid in advance $ 3,000
- Reduction of the term: from 5 to 3 years
- New fee: $ 225.87
- Total interest payment: $ 1,131
- Total payment at the end of the loan: $ 11,131
- Interest reduction: 142%
Reduce the quota.
This means having more liquid money every month since it is used less for loan repayment. With the same example, if you pay $ 3,000 to lower the fee, the situation would be as follows:
- Term: 5 years
- New Fee: $ 148.73
- Total interest payment: $ 1,924
- Total payment at the end of the loan: $ 11,924
- Interest reduction: 43%
It involves paying little loans 100% of the amount owed. In this case, the obligation contracted disappears and it is possible that the financial institution charges a commission, since it will cease to receive the interest of the loan in the remaining term.
In mortgage loans, completing the loan transaction may also involve assuming the legal costs of transferring the bank’s deed to the owner.
Therefore, opting for a total payment depends on the amount remaining to be paid, the interest, the commission, and other associated expenses.
Advantages of paying a loan ahead of time
- Savings in the amount of interest paid.
- Have the money that was previously used to pay the fee or a part of it.
- Possibility of requesting new loans.
- Good credit rating