Are Extra Payments for Personal Loans Worth It?

Do you have an existing personal loan and plan to make extra payments to complete the repayment at the earliest? It may or may not be a wise decision!

Making early and extra payments on a personal loan significantly reduces your debt burden and saves you money in interest. In fact, by paying off your loan faster, you minimise the total interest paid over the loan term, leading to substantial savings.

With this proactive approach, you can enhance your financial health. However, keep in mind that there may be certain drawbacks to making extra payments.

Extra Loan Payments: Is It Worth It?

Let’s first see the benefits that you can unlock by making extra payments towards your personal loan -

• Interest Savings - Extra payments reduce the principal balance, leading to significant interest savings over the loan term.
• Faster Debt Repayment - By paying off the loan sooner, you achieve financial freedom quicker.
• Financial Flexibility - Reducing your debt burden allows for greater financial flexibility, enabling you to allocate funds toward savings or other investments.
• Peace of Mind - Lower debt levels also bring peace of mind as they reduce the financial stress associated with allocating a portion of your income to debt repayment.

Adverse Impact of Extra Personal Loan Payment

While you can enjoy plenty of benefits with early repayment, it’s worth mentioning that early and extra payment may lead to some disadvantages as well -

• Prepayment Penalties - Some loans in the UAE have prepayment penalties, which can diminish the financial benefits of making extra payments.
• Opportunity Cost - Extra funds used for loan payments could be invested elsewhere, potentially yielding higher returns.
• Liquidity Issues - Allocating extra money towards loan repayment may reduce your liquidity. This can significantly limit the funds available for emergencies or other needs.
• Budget Strain - Making extra payments can strain your monthly budget, potentially impacting your ability to meet other financial obligations.

Ultimately, the decision of whether to make extra payments towards your personal loan involves considering the benefits and drawbacks. While early payments can save on interest and reduce debt faster, they might also incur prepayment penalties and affect your liquidity. 

Consider your financial goals, the loan terms, and your overall budget before making a decision. Maintaining a balance between reducing debt and financial flexibility is the key!

By: Mousree Das