When going through the process of drawing up a budget, it is always wise to put any extra cash towards increasing your monthly installments on debt according to Ariel Eliasov, Head Credit for FNB Loans Photo: File

When drawing up a budget, it is always wise to put any extra cash towards increasing your monthly installments on debt.

It does not matter how small the amount is, if you pay extra to towards debt, you can realise a saving because interest is calculated on the outstanding balance daily and the repayment period is shortened. 

Every extra rand you pay will save you interest and this effect compounds over the life of the loan.

Ariel Eliasov, Head Credit for FNB Loans said, "There are two common misconceptions when it comes to paying back a personal loan: the first is that one must stick to the contractual repayment or settle the agreement entirely – this is not true, credit providers are required by law to recognise additional payments and every extra rand paid above the contractual installment will save you interest. The second misconception is that there are penalties associated with paying extra when, in fact, early settlement fees only apply to large credit agreements (typically mortgages)." 

Eliasov added, "Even on large agreements, no fee is applicable if the agreement is not settled entirely – this means that you can save interest charges without attracting any penalties by paying extra. If you are concerned about penalties check your contract to see how they are applied". 

As an illustrative example, paying just R110 more each month on a R10 000 loan with a term of 36 months at an interest rate of 20%, will save R468 in interest and R345 in fees (with even more saved on insurance should this be required by the lender).

"It’s important to note that the interest granted for a loan depends mostly on the credit history of the borrower. For this reason, interest rates will vary based on each individual’s personal circumstances," said Eliasov.

Should the borrower opt to pay R500 per month on the same R10 000 loan, the saving increases to R1 194 in interest and R897 in fees.

According to Eliasov, paying off a loan quicker than the prescribed period benefits the borrower financially because it frees them earlier from debt obligations and reduces the interest and fees paid.

"Make sure that when you decide to take a loan, you are clear on what you will use the money for. Taking a personal loan to fund lifestyle expenses such as entertainment and shopping sprees is not advisable. Rather borrow to finance something that will benefit you long after the debt is repaid such as education or improvements to your home," concluded Eliasov. 

PERSONAL FINANCE