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Paying a Loan ahead of the Due Date is Not As Easy As You Think. Here’s Why.

You might be thinking there’s nothing difficult about paying your debt ahead of time. You just walk in, tell your lender you’re ready to pay now instead of 10 years from now, you shake hands, and all is settled, right? 

Wrong.

In fact, most times it’s more complicated to prematurely close a loan than just pay it in accordance to the the original schedule. If you notice, the longer the tenor, the higher the total amount payable. So a loan payable in 20 years incurs more interest than a loan payable in 5. So when you choose to pay in advance, you are actually reducing the lender’s profit to a smaller amount than what they were expecting.

In rare cases, you might not even be allowed to settle in advance. It is best to consult the agreement or contract you signed to know what kind of policy you are bound to abide with.

In general, though, here are some things you should expect if you want to settle your loan early:

1. You might be asked to pay for a pre-termination fee.

As explained earlier, you will be depriving your lender of revenue it is already expecting. To make up for it, they could ask you for a pre-termination fee, on top of the principal amount and any interest that may have accrued before you settle.

2. You’re required to give notice.

For most lenders, a 28-day notice period should be observed. This means you have to tell your bank that you intend to close your loan early a month before you actually furnish payment. You will still be charged the full interest for these 28 days, or until the next billing cycle, depending on your agreement.

3. Your post-dated checks will be invalidated, but not returned

Any post-dated checks you issued the lender will remain in their custody. You are not entitled to have it back, but you can rest assured those will not be used to draw funds from your account anymore. After all, your early repayment will automatically invalidate any PDCs you may have already released. If you want to be sure, though, you can simply call your bank and ask them to cancel those checks for you.

4. You have to keep a close eye on your account

Aside from keeping the acknowledgement receipt for your early payment, keep an eye on your account to make sure you’re not being charged any more than you should. It’s okay to ask for confirmation that your loan has closed, and that you’re no longer getting charged for it.

Here’s a quick review of the steps you have to take if you want to pay off a loan ahead of time:

1. Give notice: It’s best to visit your lender to explain in person that you intend to settle the contract ahead of time. Do this one month before you actually pay.

2. Ask your lender to compute your final amount payable: Double check the break down. It should reflect your remaining loan balance, applicable interest, processing fees, and pre-termination fees. Don’t hesitate to ask about any extra charges you might see on the computation.

3. Pay what’s due and keep the acknowledgment receipt as proof that you are now free from your debt obligation.

4. Check your accounts to make sure you’re no longer being charged for the loan you just settled. 

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