When you apply for a loan, you’ll have to take numerous factors into consideration. It’s important to ensure that the process of repaying your loan planned smoothly. It’s important for you to analyze your income and make calculations which will give you a better idea about your liability to your bank.
You need to make the right choices to ensure that your financial stability isn’t affected negatively. Prepaying your home loan can be a great alternative to paying in installments, but you’ll need to decide if it’s a financially sound idea.
Prepaying a Home Loan
A home loan is prepaid when the loanee chooses to pay off the principal sum or a significant part of it in advance. This is a great way to cut down on your liability towards the bank. This also means your eligibility for another loan will improve.
Prepaying a home loan is a great idea if you have enough money in your savings to do so, or if you’re expecting a bonus you could use to take care of your loan.
You can also prepay a certain amount of your home loan and then transfer it to another bank with lower interest rates, known as a home loan transfer.
Benefits of Prepaying your Loan
Prepaying your loan can go a long way towards saving money for your future needs. It’s a good idea if you have a cash reserve which you’ve been saving to pay off your loan.
Also prepayment of your loan will have a positive effect on your credit rating, improving your credibility with the bank. This also means that you’ll eligible to apply for larger loan amounts and lower rates of interest in the future.
Prepaying your loans can also make you eligible to apply for a top up loan, since your credit rating with your bank would have improved.
Why Prepaying your Home Loan is a Better Idea as Compared to Investing your Money
While investing your money into a profitable cause seems like a good financial plan, it would be much better if your just used that sum of money to prepay your pending loans. This differs from person to person, depending on their financial situation.
Prepaying your home loan takes a great deal off stress of your shoulders and it reduces your liabilities.
While investing your money and paying your loans later might seem like a feasible idea, you need to keep in mind that the economy is ever changing. Inflation and deflation are always working in tandem to create an easily collapsible market. Your investment has an equally good chance of failing as it does at succeeding.
Avoiding Fluctuating Home Loan Interest Rates
It is always a better idea to prepay your loan as the interest rates in the housing market are constantly fluctuating and you never know when they might rise. Prepaying your home loan allows you to deal with your entire loan amount at one go and thus does not subject you to the change in the fluctuating rates of interest. It is a great way to avoid the ever changing rates on your loan amount.
Averages Better Returns
Since the rates of interest that you pay on a home loan are significantly higher that the rates of interest that you would receive on any investment you make, prepaying your home loan is a much better way of ensuring that your money is being used for a significantly more productive purpose. The returns you would get on your investment would definitely be lower that the amount of money you save by paying your loan off in advance.
To conclude, it is a much better idea if you prepay your loans instead of investing your money elsewhere, as in most cases it will guarantee you a sense of financial stability which you most probably won’t get out of any investments you make.
Also Read: How to Get a Home Loan without a Guarantor?