The money that you receive from a bank or a finance institution in turn for a commitment to repay the principal amount, with interest is called a loan. Since there is a risk for a possible default, they incur a fee to undermine this risk. This fee is called interest.
When a loan is carried out, it is required to be paid back to the lender within the specific period of time. Repayments are inclusive of the principal amount outstanding and the interest rate amount.
Loans help us in making our life easy, however there are some rules that they come with therefore, it is important to always pay loans on time. Loan repayments should be adhered to on time because not only do they decrease the loan liability and interest incurred, but they are also reflected on the credit score. There is also a long-term implication on credit health. Following are reasons why repayment of loans on time is beneficial in the long run:
- Strengthen Debt-to-Income Ratio:
Paying off loans on time comes with its perks. As lenders contemplate whether or not to approve a loan, they also calculate the income percentage that goes into repaying debts. The debt-to-income ratio is increased when loans are paid off on time which makes the borrower to likely get approval for loans in the future with even more beneficial terms.
- Improving Credit Score:
Paying off loans early results in an increase in the credit score of the borrower. This not only signifies that you are creditworthy, but it also increases the borrowing capacity. When applying for a personal loan or a credit card, the credit score will be taken into account by the bank for approvals of a large amount.
- Late Fee is Avoided:
If Personal loan EMI’s are paid on time, then getting a personal loan is easier at the same rate. Hence, altogether avoiding any late payment penalties.
It is easy to preach about the timely payment of loans, than to actually put it into practice. Which is why it is integral to have a secure financial plan, that can help in carrying out payments efficiently and effectively.