Why pay early, what’s going on, the bad news is that you have debt, but the good news is that you have a little extra money. Is it better to pay off your loans early or just keep up with the normal monthly payments?
In order to make the right decision, it is important to evaluate what you get from the loan against the cost of maintaining the loan. Save the package if you eliminate debt early, but it’s not always the best thing.
For now, let’s focus on the benefits, but you also need to be aware of the potential drawbacks of paying off your loan early.
Save by paying a loan
The best reason for paying off debt is to save money and stop paying interest. Interest is not really bought for anything except the ability to pay slowly – your house doesn’t get bigger just because you pay a lot of interest.
Some loans are worth 30 years or more, and interest costs are sure to increase over time. Other loans may be short-term loans, but high-interest rates make them expensive. With high debt costs (like most credit cards), it’s almost unusable: paying the minimum is a bad idea.
Over the course of your life, you will keep more of what you earn if you pay off loans quickly.
So what is a compromise? When you pay your debt early, you will not use that extra money. This may mean that you enjoy less luxury on your monthly budget, or if you do with a smaller cash pad (which makes it difficult to pay a “surprise” cost).
Moreover, you pay the opportunity cost: You will have to make up some extra money to achieve other goals (retirement or home pay, for example).
In rare cases, with “pre-budget” loans, it’s not cheaper to pay early because expenses are already cut into your loan – but you can eliminate that monthly payment.
When you pay down debt, you are much stronger financially. That money you put into your monthly payment will now be available for other purposes – we hope you will use it to fund your goals.
You also become more attractive as a lender. Lenders want to make sure that you have enough income to repay the loans and that your existing loans do not already eat up too much of your monthly income (calculate the percentage, which lenders call the debt-to-income ratio). When you pay off your debt, you improve your debt by income ratios and are more likely to get approved for a new loan.
Your credit scores can also improve when you pay down debt. Part of your credit score is based on how much you borrowed – especially against the maximum amount you could potentially borrow.
If you are maxed out, your credit scores will be lower, but paying down debt means you have more room to move. For more details, see how your credit limits affect your credit.
Peace of mind
Some people hate debt. They pay off the loan as soon as possible – even if it doesn’t make the best financial sense. It’s okay, as long as you know why you’re doing it.
You can’t put a price on luck. You may want to eliminate your debts before retirement, or you may be slimmer than your monthly payment.
Look at the big picture and make an informed decision to live with.
How to do it
Now that you know what happens when you pay off your loans early, you are probably ready to move on. In many cases, it’s as simple as sending extra money – whether you do it all at once or just pay a little more with each payment.
Call or email your lender and ask how to do so that your payments are properly credited to your account so you know exactly how much you want to send.