Should You Repay Your Personal Loan Early?

Banks in Singapore charge a small fee if you repay your personal loan early. But in these two situations, it might just be worth it.

Sometimes, life throws us a curveball and we find ourselves in need of extra money. Thankfully, Singapore’s competitive banking industry, coupled with strict laws, allows for convenient and affordable personal loans.

Personal loans can help you get through a difficult time by providing the funds you need quickly. You can then repay the amount owed through regular monthly repayments. The longer your loan tenure is, the smaller your repayments will be. This allows you to find a loan that fits your financial situation.

Sticking to your original repayment plan is perfectly fine but there may be certain situations when it might be advantageous for you to repay your loan early. These include the following scenarios:

1. When You Need a Mortgage Loan

If you are looking to purchase your own home and need a mortgage loan to do so, you should consider paying off your personal loan early. This is especially so if your Total Debt Servicing Ratio (TDSR) is too high.

Your TDSR is a measure of how much income is going into debt repayment. Mortgage loans, if any, are also included in the calculation of your TDSR.

As you’re probably aware, there is a cap of 60% on the TDSR. Any mortgage loan that would push your TDSR above this limit will not be allowed.

This means that if your TDSR - without mortgage loan - is say, 50%, any mortgage loans granted are likely to be too small to be useful. This will throw off your plans if you do not have enough cash savings to pay for your flat - a situation most of us will likely encounter.

Because personal loans count toward your TDSR, paying them off early will help you reduce your ratio. This will make room for a larger (and probably more useful) mortgage loan.

(For completeness, do note that if you plan to buy an HDB flat or an Executive Condominium, the maximum amount you can borrow is limited by the Monthly Servicing Ratio (MSR), defined as 30% of your gross monthly income. This is in addition to satisfying the TDSR.)

2. When You Need to Start Saving for Retirement

There are many reasons to save money, including important ones like getting ready for retirement. Stepping aside from the ongoing debate on whether you should focus on saving money or clearing your debt, consider that money you owe today will reduce the amount of money available for use tomorrow.

When saving for your retirement needs, the earlier you start, the better. Even 5 years can mean the difference between a comfortable retirement and one plagued by sleepless nights.

Funding a retirement plan while paying off your loans is like trying to fill up a tank using a leaky scoop. You’ll slog like crazy to make it happen, but still end up thirsty in the end. Clearly, it is much better to be free of debt, so you can comfortably set aside money and easily increase your savings should the need arise.

However, this doesn’t mean you should wait till you pay up all your personal loans before starting to plan your retirement - it might be too late by then.

Hence, consider clearing your personal loans early so you can start saving for your retirement as soon as possible.

How to Repay Your Personal Loans Early

If you have a substantial amount of spare cash, like from your year-end bonus for example, you can simply make a lump-sum repayment and be done with it.

However, you don’t have to repay your personal loan all at one go, especially if that will only cause greater financial strain. You simply have to pay more than your monthly instalment each month.

For example, if you owe S$15,000 on a 7-year loan and repay an extra S$100 each month, simple mathematics tells us that you can pay back your loan in under 5 years. This will give your money an extra 24 months to grow, which will only put you in a better position for retirement.

One caveat though; early repayment will incur a fee. This typically ranges from S$150 to S$250, or a certain percentage of your outstanding balance at the time of complete repayment - whichever is higher.

At the end of the day, when you think about the ability to free up your cash flow and start saving early, the early repayment fee is a small price to pay.

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