You’ll save money and your credit score if you pay it off early, but you’ll want to compare pros and cons before you decide.
There are also lenders who will give you prepayment penalties that will eat up your savings and withhold tax benefits on interest when you repay the loan early.
Lower Interest Rates
Having a loan paid off early has many benefits, top of the list is the low interest. Your loan term will increase and your interest rate will increase; paying off your loan early could be the difference between hundreds or thousands in total expenses down the road.
According to Forbes’ Casey Bond, if you’re in high-interest credit card or personal loan debt, you can save a lot of cash with debt consolidation. If you decide to do this, though, know the dangers – penalty for early loan payment could exceed savings in interest; also paying much of your savings early as early loan payment could make less money left for surprise costs and financial objectives – this could make less money available for other purposes – making early loan payment a bad idea if you need to be flexible with your finances – see a financial advisor for best results when doing this!
Shorter Loan Term
Lower interest rate short term loans save you time and money on the long run, but you should read all the documents in your loan so you can weigh any extra costs you will incur for early payment and your current and future incomes to see if you are capable of paying off the debt completely.
Almost all the short term loans require monthly payments which is taxing on your pocket, which leaves little money left over for something like emergencies or other expenses. Instead of taking out a loan, one can avail of a buy now, pay later (BNPL) service which pays in monthly interest-free installments instead. It can be cheaper than the steep interest of short term loans but if your finances become a mess and you cannot contain your spending, then borrowing one can lead to a perpetual cycle of getting in more debt to pay for the necessities of life.
Boost Your Credit Score
The higher your credit score, the more financing options available to you that will save you money and give you career growth. Increase your score as well, it makes you feel good because it makes living the good life a little bit easier.
A high credit score signals that you can keep a handle on money and lenders are more likely to grant you a loan or line of credit. And having good credit can make offers more attractive and allow you to negotiate a better salary.
Get a higher score only by weighing its rewards against early loan repayment. If so, factor interest savings, prepayment penalties, and other financial intentions into this decision. You can have this evaluation done by a financial planner who can design you a custom financial plan for your goals and your budget.
Increase Your Savings
Paying off your personal loan early will significantly improve savings because of the interest deduction, but before you start doing this make sure you do your own due diligence and know if pay off your personal loan early is the right move for you. For instance, if the rate on your personal loan is so high that you’re only making more by using your excess money on lower rate debt or investments might be a better use of it.
Pay extra on the principle amount to speed up your loan repayment. Always tell your lender that any extra payments should be used to pay off this debt sooner.
Tax refunds, bonuses or any unexpected cash prizes should go toward loan repayment. But this will erode your emergency fund and so, any additional savings should align with your general financial needs and interests.
