Borrowing from banks can be a fantastic way of financing aspirations or overcoming tough periods. With loans, we’ll certainly have to deal with making loan repayments.
“Can I repay my loan early?” is a question some of us may be wondering about. Paying off our personal loans early may seem like a good idea as we no longer have to pay interest, plus we get to feel good about clearing a liability. However, a big downside of early loan repayment is incurring foreclosure charges on personal loans.
So yes, while you can pay off a personal loan early, be prepared to deal with loan early repayment charges if such charges are stated in your personal loan agreement. In this article, we’ll explore how much the charges are and if the charges are worth paying for.
Are there foreclosure charges on all personal loans in Singapore?
What exactly are foreclosure charges on personal loans? In simple terms, they are early repayment charges when you repay the loan before the loan tenure expires or when you cancel the loan. Most banks charge this penalty fee which helps to cover the banks for their loss in interest income.
Let’s take a look at the most prominent foreclosure charges on personal loans in Singapore to help you calculate the cost of early repayment of your loan:
| Citi Quick Cash | Standard Chartered Bank CashOne | UOB Personal Loan | HSBC Personal Loan | DBS Personal Loan | POSB Personal Loan | |
| Partial Repayment Penalty | Does not allow Partial Repayment | $50 per change of tenure, subject to the bank’s approval | Does not allow Partial Repayment | 2.5% of redemption amount | Does not allow Partial Repayment | Does not allow Partial Repayment |
| Full Payment Penalty | 3% of outstanding unbilled principal amount or $100 whichever is higher | $150 or 3% of the outstanding principal, whichever is higher | $150 or 3% of outstanding loan amount, whichever is higher | 2.5% of redemption amount | $250 | $250 |
Reasons for paying off your personal loan early
1. Mortgage Loans
Mortgage loans are generally larger than other loans, and this may push your Total Debt Servicing Ratio (TDSR) above the cap of 55% if you have other existing loans to service. Therefore, an early loan repayment will help to reduce your TDSR and allow you to take on a larger mortgage loan should you require it.
2. Retirement
Saving for retirement is an uphill task especially when you have loans to repay. Early loan repayment lets you pay less interest overall, and can get you focused on building your retirement fund earlier on.
3. Cash flow for investment
Another benefit of personal loan early repayment is that you can free up your cash flow sooner and put the funds towards investment opportunities that help grow your money.
How to close your personal loan early?
Thinking about “how to close a personal loan early”? You’ll be happy to know it’s a fairly straightforward process if you have enough spare cash on hand to pay off the entirety of the loan. Here are some ways to repay your personal loan smoothly.
Otherwise, an alternative to making a big lump-sum payment is to increase your monthly instalment each month. The caveat is that early loan repayment will likely incur a fee depending on the bank, as the above table shows.
Food for thought: Are foreclosure charges worth it?
To determine whether foreclosure charges on a personal loan are worth paying, first do a calculation of early repayment charges on your loan. Next, come up with the remaining interest you would have to pay if you were paying the loan as per normal.
For instance, if the bank loan early repayment penalty is $1,000, and you would pay $700 in interest if you continued the repayment as per the original tenure, then it does not make much sense to incur the foreclosure charges on your personal loan.
On the other hand, if the amount you get to save is far greater than the penalty, then it makes much more sense to incur the penalty. The money you save can be used for investing or for building up your retirement fund. If you’re in need of a mortgage loan, the lowering of your TDSR can make all the difference when you foreclose your personal loan.
Remember that you’re not entirely restricted by your liquidity; if you don’t have the cash flow to pay off the lump-sum of your remaining personal loan, simply request to increase your monthly repayment each month.
Lastly, remember that it is seldom wise to repay another loan or solve credit card debts with a loant, unless you’re sure there are significant interest savings to be had.
