Prepayment is a relatively simple concept, but if you understand it completely, you could save thousands in the long run. As problematic as it is, it’s normal to be in debt these days. If you’re starting a family and need a house, a very small percentage of the population has the money to buy one.
You’ll need to take out a loan if you need a car too. In Singapore, personal loans are becoming more common. In 2020, 1 in 4 women and 2 in 5 men took out a loan. This is 24% and 41% of the genders, and the number is only expected to increase. No matter how the economy is, the truth remains that we’re not in an era where one salary can maintain a family.
Among the most widespread reasons for taking out loans is to cover daily expenses. This statistic means that if people take out loans regularly, they’ll have a lot of trouble paying them off.
It’s a good idea to spend your monthly budget wisely and familiarize yourself with the concept of advance payment. Using a BNPL company like Atome can help you regulate your spending patterns and become debt-free as quickly as possible.
The definition of prepayment
First, we’ll give a clear idea of what prepayment is. If you’re in debt, you already know there’s a date set for when you’ll be able to settle your loans, usually years into the future. Prepayment means paying off your loan earlier than that time.
It means paying an extra over the necessary sum. That set amount is usually imposed in the form of monthly increments. You can either prepay a personal loan entirely or only submit a partial payment in any month.
This method doesn’t just apply to bigger loans; you can also prepay the top-up on your credit card before you receive a statement. But you’ll need to consider your loan details to ensure you don’t end up paying more or a penalty.
This is because most loans, especially those taken from a bank, prevent you from paying all that is owed at once. These regulations make sure they don’t end up losing money.
If handled correctly, it’ll take the edge off of your debt and help you save a lot of money in interest fees, so if you have surplus cash, read up on whether you can make an extra payment.
When do we need prepayment?
The biggest question is when we should make prepayments. The difference in interest rates is when people are most tempted to make prepayments. Consider this; a person takes out a large loan at a 7% interest rate. Several fluctuations mean that he’s now paying around 13% on the same loan, while newer ones have a rate of 8%.
It can seem like a good idea to take out a new loan to pay off the old one, but there are many factors you need to consider before rushing to the bank. For one, view the number of installments and how much you’d be charged to make the extra payment.
It would be best to keep loan tax benefits in mind and whether you have a fixed-rate loan. The latter means that market changes have no effect on the interest rate.
People sometimes consider prepayment if the principal amount hasn’t gone down even after a few years. For example, if a personal loan of $10,000 over ten years with a 7% interest rate is checked after, say, four years. The balance might only be around $9,700.
This slight decrease is because the interest amount takes up a significant portion of the loan in the first few years. But it makes people think that prepaying everything at once is better.
Companies might also ask for an advance payment guarantee as insurance. It’s a stipulation in some instances, e.g., if a person with bad credit is constantly behind their payments, the bank may ask them to pay in advance to avoid trouble.
Why is prepayment a risk?
Now that you know why you’ll need prepayment, you need a thorough understanding of things that can go wrong. As mentioned above, you need to appraise what sort of bank loan you have before you decide to prepay.
Banks often incur charges if you try to close a loan before the set time. These penalties are because they’re also making money due to the interest rate. Check if the money you have to pay to close ahead of time is higher than the total sum you’ll pay on monthly instalments.
Most often, prepayment affects MBS (mortgage-backed securities) and corporate funds because they’ll have to reinvest the money at current interest rates once an existing debt is paid in advance. That’s why prepayment penalties exist; otherwise, interest rate risk would be one-sided.
Usually, people don’t have the financial means to make prepayments because they’ve already exhausted all of their standards before the loan. Most companies also require an advance payment guarantee to ensure they don’t lose money. It’s also why you can only apply for a loan if you meet certain requirements.
It’s often years before people have the surplus to consider prepayments, and reports show that the number one reason personal loans in Singapore are taken out is to cover daily expenses. You’ll need to exhaust all your avenues if you want to pay early.
Why do people often say ‘do not prepay’? Does prepayment reduce interest?
You’ll often hear people say that it’s useless to prepay after half of the loan tenure has passed because of the low-interest amount by that time. But consider that the interest rate applies to the unpaid principal amount and remains the same throughout the tenure.
While prepayment doesn’t reduce the interest itself, it will reduce the amount of time you’re paying installments and, in turn, the total amount you paid over the principal in interest. So, saying that you should or shouldn’t prepay depends on the loan.
Currently, a Singapore loan at the best banks has an average rate of around 3.48%, which brings the payable amount to S$11,044 from S$10,000. If you can get this amount down, you’ll only be helping yourself.
You’ll notice that the advance payment guarantee Wikipedia page lists some ways to receive money on time. Banks use these guarantees to make sure you can pay a loan. That’s also why you need to meet a certain salary level to be eligible for borrowing money; it’s the bank’s insurance.
Which is better, increase EMI or prepayment?
Once you’re back on your feet and have extra money, either through bonuses and raises at work or controlling your spending, you should first pay off a loan.
Gaurav Mashruwala, an Indian investment advisor, stressed the importance of setting aside any money you can to pay off your loan, saying that several problems over the payment period can cause trouble and leave you with debt but no means to pay it.
Apart from prepayment, you can also increase EMIs. These are equated to monthly instalments where you pay a set amount each month. There are different methods to calculate them; the flat-rate method means the interest rate is based on the principal loan even though it’s reduced each year.
The reducing-balance method applies the interest rate to the loan amount left, so the EMIs are lower. Either way, EMIs mean you’re paying a fixed amount for a specified time.
But the next question is whether you should go for an increase in EMI or prepayments. If we consider a regular loan in Singapore, an increase in EMI might do the trick. Again, you need to sit down and calculate how much you’ll be saving either way.
As always, consider what sort of EMIs and loans you have. There are aspects to consider before making a decision.
Do you need the tax benefits? The money you’re saving often makes retaining the tenure better than paying off the cash at once because you might not have the budget to handle the sudden increase.
You can use a loan calculator to calculate the total interest, installment plan, and cost of every move. Ask your bank for prepayment penalties or other expenses when changing your plan.
An increase in EMIs means you’re upping the amount you’ll pay each month to pay off the loan faster. You’ll probably need a strict budget to do this, but you can set up a rate proportional to your yearly salary increase.
That’s also where buy-now-pay-later services like Atome can help. Say your monthly spending money is $400, but your microwave breaks down, so you need a new one. A good one costs at least $80, which’ll throw your budget off. Using Atome will cut it down to $26 per month, which is much easier to handle.
Make sure you can handle the changes and draw up a plan that uses both EMIs and prepayments. Using the proportional method, increase the EMI amount yearly and use any bonuses or surplus money for prepayment.
While this will make a tedious lifestyle for a few years, paying off a loan and having the pressure off your shoulders will let you live comfortably for the rest of your life.
Why you should go for Atome
We know that staying within budget keeps our life simpler and debt-free in the long run, but how can you achieve it? Even if we don’t talk about extra purchases, things like microwaves, freezers, or other home items can cost a hefty sum that puts you way over your monthly limit. And everyone wants to treat themselves at times.
That’s where Atome comes in. Established in December 2019, the Singaporean company has risen to the top of the food chain in the BNPL retail industry. Today, it has a footing in over 8 countries, including Indonesia, Hong Kong, the Philippines, Thailand, Mainland China, Malaysia, Singapore, and Vietnam. With Atome, you can pay off your shopping bills through monthly payments and maintain a steady spending pattern. It allows you to prepay your loans without worrying about missing your payments because of overspending your monthly budget.
With a reputation for being trustworthy and charging no interest or hidden fees, the company encourages careful spending rather than splurging and regretting. Their system lets you divide a purchase into three monthly payments, paying 1/3 up front and the rest over the subsequent two months. What’re you waiting for? Get the app now!