With most loans, making additional repayments can help you reduce the amount of interest you have to pay and ultimately help you pay it off sooner. But circumstances can sometimes change while you’re paying back your loan, and at some point you may find you need some extra funds.
If this is the case, redrawing from your personal loan may be a suitable option.
What are the advantages of redraw?
The main advantage of a redraw facility is that you’re able to pay down your personal loan reducing the amount of interest you have to pay, while still having access to any additional repayments above the monthly required amount should you need them.
Say you manage to pay an extra $100 onto your personal loan each month for 6 months; that’s $600 that will offset the interest you are paying on your loan. Should something unexpected happen and you need to access that money, it’s there for you. While you’ll now no longer be ahead on your repayments, you’ll have saved on interest repayments over the period in which those additional repayments remained in your redraw facility.
What do you need to consider?
Redraws on personal loans typically have certain conditions around them. For starters, the loan needs to offer the facility as a feature – these are usually personal loans with a variable rather than fixed interest rate.
You may also need to have reached a certain amount in additional repayments in order to redraw the funds. With CommBank’s Variable Rate Personal Loan, for example, you need to be at least one month ahead in your repayments and have at least $500 available to redraw.
Keep in mind, too, that fees may apply to redraw the money – check for these with your loan provider. At CommBank redrawing is free online via NetBank, the CommBank App or on the phone, however there is a $10 fee to redraw in branch.
What are your other options?
If you need to redraw more funds than what’s available, you may want to consider refinancing your personal loan instead.