It is tempting to repay personal loans NZ early when the period of the loan is almost about to end in a few months. But before you squander your savings trying to repay a loan early that is almost at the end of its duration, it is just as crucial that you make sure that all your other financial obligations are accomplished. Understanding financial goals as well as the priority ranking of paying back your loan is important to maintain financial stability and independence. Here are some do’s and don’ts to keep in mind when you are unnecessarily excited to pay off a loan early.
1. Do Give Precedence To Your Monthly Budget
Your monthly budget includes finances for basic necessities such as monthly utilities, groceries, rent, transportation costs, and miscellaneous expenses. Always contemplate the payments of your credit cards, student loans, or installments on your vehicle whenever you compile a monthly budget. Car and property loans are secured or endorsed by property that you own, which you should not risk losing. All of these monthly expenses, especially your car and property loans, always need to be prioritized instead of repaying a personal loan early.
2. Don’t Deprive Your Retirement Savings To Pay Off A Loan
You might consider splitting the extra payments from your retirement plan if your retirement plan has a higher annual percentage rate of return in comparison to your loan. The annual percentage rate of returns on a retirement plan will be considerably higher than your loan because they are backed up by property you own or monthly payments you make regularly towards the investment. It is important to remember that a loan will never make positive contributions back to your finances like the investments you make to your retirement plan will. It is for this very reason that you should not repay a loan early if it means skipping payments to your retirement plan.
3. Do Know The Prepayment Fees Of A Loan From The Start
Some financers still charge a fee, also known as a prepayment fee, from clients who want to pay off their loans early or before the scheduled payment times. A prepayment fee ensures that it is still viable for financers if an applicant decides to repay the loan earlier than scheduled to save on interest rates. A resourceful person should calculate which is higher, the prepayment fee, or the interest rate that you will be paying in the final few payments. It would be imprudent to pay the prepayment fee if the prepayment fee is much more than the interest you would normally pay for the remaining payments.
4. Don’t Overanalyze The Entire Situation
It is important to have a safety net investment to ensure that your finances remain consolidated in the end. It is wise not to overthink a situation in the effort of achieving perfection in your finances. In some cases, this might mean that funds will go towards repaying your loan instead of a credit card or any other expense. Sometimes paying off a personal loan is important to achieve mental clarity by knowing that a specific loan has been completely paid off.