Attaining the conclusion of your personal loan is bound to bring a sense of pride and achievement, yet paying it off sooner by making extra payments can be even more rewarding. Do you have a personal loan but are uncertain if additional repayments are permissible?
Benefits of extra loan repayments
Some personal loan lenders will allow you to make additional repayments on top of your regular loan installments. This may help you to reduce the loan principal much faster than if you made the minimum-required payments. Plus, by reducing the principal amount you’ll potentially pay less interest over the life of the loan. Making extra payments to your loan in Australia can be highly beneficial for several reasons:
- Faster loan repayment: Extra payments directly reduce the principal amount, allowing you to pay off your loan sooner.
- Significant interest savings: By reducing the principal faster, you’ll pay less interest over the life of the loan, potentially saving tens of thousands of dollars.
- Increased financial flexibility: Many variable rate loans in Australia offer unlimited additional repayments, giving you control over your financial planning.
- Reduced loan term: Consistent extra repayments can shorten your loan term by several years, freeing up future income for other financial goals.
- Emotional boost: Paying off smaller debts first (known as the Snowball Method) can provide a sense of achievement and motivation to continue.
Yet, lenders make their money from the interest you pay; thus not all will allow this. Moreover, some may even charge a fee for additional payments made. Ensure to read the associated product disclosure statement with your personal loan thoroughly before taking any action.
Important to remember
- Check for penalties: Some fixed-rate loans may penalize you for extra repayments, so verify your loan terms first.
- Timing matters: For study and training support loans, making voluntary repayments before indexation on June 1 can be particularly beneficial.
- Repayment strategies: Consider methods like the Snowball or Avalanche approach to maximize the impact of your extra payments.
- Frequency of payments: Switching to fortnightly repayments instead of monthly can result in an extra month’s worth of repayments annually.
While making extra loan repayments is generally advantageous, it’s important to balance this with other financial priorities and ensure you maintain an emergency fund. But what happens if you miss a loan repayment? Always consult with a financial advisor to determine the best strategy for your specific situation.
What about redrawing?
If your personal loan lender offers the option for extra payments, you may also find that they have a beneficial redraw facility available. Redraw facilities enable customers to access any additional repayments made over their loan period from time-to-time. This can be useful in times of financial strain – such as overdue bills or sudden expenses – and even if you’re looking to finance an enjoyable family holiday!
Before you withdraw any extra payments you have made on your personal loan, it’s important to remember that this will raise the balance due and possibly increase interest rates. This can lead to higher monthly payments as well. Some lenders may require additional repayment before allowing access to these funds. Additionally, redraw facilities are typically only available for variable rate loans; if a fixed rate option is desired, then likely there won’t be one accessible.
