Loan Liquidation Meaning & How to Liquidate Your Loan

Last Updated on Jun 20th, 2024

Olamide Famuwagun

Are you drowning in debt? Or feeling like you’re stuck in a financial black hole?

Hold on, there’s light at the end of this tunnel!

This guide will help you understand what loan liquidation is and how you can navigate your way out of debt.

So buckle up, and let’s get you back on solid financial ground!

What is Loan Liquidation?

A liquidated loan is a type of self-liquidating loan, meaning it repays itself through the cash flow generated from selling the financed asset. Loan liquidation involves selling off assets used as collateral to repay the loan if the borrower defaults.

This can also be beneficial for several reasons, such as saving on interest and improving your credit score.

Benefits of Loan Liquidation

You’ll save money on interest payments in the long run.
Paying off a loan early can improve your credit score by lowering your debt utilization ratio (the amount of credit you’re using compared to your total credit limit).

Self-Liquidating Loans

Self-liquidating loans are a type of short-term loan where the borrowed funds are used to purchase assets that are then sold to repay the loan.

This can be a good option for businesses that need to purchase inventory or other assets that will be quickly sold and generate cash.

How to Liquidate Your Loan

Before you liquidate your loan…

Prepayment Penalty: Check your loan agreement for any prepayment penalties. Some lenders may charge a fee for paying off the loan early.
Benefits: There are advantages to liquidating a loan early. You’ll save money on interest payments, improve your credit score by lowering your debt utilization ratio, and be free of loan obligations.

Steps to Take in Liquidating Your Loan:

Contact Your Lender: Get in touch with your lender and express your intention to liquidate the loan.
Calculate the Payoff Amount: Ask for the payoff amount which includes the outstanding principal balance and any accrued interest up to the date of liquidation.
Make the Payment: Choose a payment method that works for you and ensure you have sufficient funds to cover the payoff amount.

Here are some tips you must keep in mind to experience a successful loan liquidation process:

Make your repayment or liquidation plan a priority: When your repayment plan is your priority, you get to make a conscious effort toward it. These efforts include saving ahead to cover your EMI (Equated Monthly Installment) even before it becomes due.

Focus on repaying your high-interest loans first: Most people often focus on paying the smaller debts first and gradually move up to the bigger ones. However, research has shown that this would only prolong your repayment period and increase the interest you get to pay. Therefore, try to direct the maximum amount you can afford to pay to your high-rate loans while securing necessary payments on the smaller ones.

The higher your income gets, the higher your repayment percentage: This is another factor that can help you go through a successful liquidation process. Make a conscious effort to increase your repayment percentage each time you obtain an income increase. This would cut short the time that your repayment plan would have lasted and put your mind at ease.

Use bonuses and windfall gains to pay larger debts: Rather than spend your bonuses on the latest gadgets and explore your desires, settle your costly debts.

You can also use existing investments to repay debt: While it may seem unwise to use your investment for loan liquidation, it goes beyond that in reality. Not only does your indebtedness reduce your total credit worth, but it also ends up making the top of your expenditure list. Therefore, to avoid being clogged by debts, it is better to clear them off when you have what it takes.

I hope you conquer your debt!

For more information on debt, you should check out my guide on debt consolidation loans in Nigeria and how you can navigate your finances in a tough economy.