You might be making your lenders/creditors richer and yourself poorer if you’re in a hurry to pay off your debts. Though debts are considered bad, sometimes paying them off at the right time make sense.
Before you arrange money to kill your debts, check out some of the pros and cons of paying back your debts early.
First and foremost intention of anyone who wants to pay back his/her loan fast is to save money on interest payment. Interests won’t get you anywhere except digging out more money from you. The more you’re current on your loan, the less you pay toward the interests.
No one can measure your satisfaction that you’ll have after paying off all your debts. Doing so will make you free from the grip of creditors. This marks the end of collection calls. Hence, you can concentrate on other financial activities, which got delayed due to your debt payments.
Once your debts are paid off, use that money, which you’ve been making the monthly debt payments, toward something fruitful. Maybe you can invest it in a new car, home, or an emergency fund that you wanted to do for a long time.
As you can see, repaying your debts faster will give you a monetary freedom to purchase whatever you want (but, don’t forget your financial limits even if you have loads of cash!).
Creditors see you as a responsible borrower if you have a low credit utilization ratio. It’s possible if you make timely bill payments and pay off your credit card debts (if any) as soon as possible. In this case, quick debt repayment will prove beneficial for your finances. Moreover, not having a credit card for the fear of incurring debt is also bad for your financial health.
Some lenders charge you a prepayment penalty if you pay more than enough for your loan. It’s because they’d lose money on interest if you pay off the loan (such as, mortgage and auto loan) before time. Check out the fine prints for prepayment penalties before you make a speedy repayment on your loan.
Whenever you’re pouring extra cash toward your debts, you’re actually saving less for yourself. Therefore, you may have to suppress your desire to go on a vacation for now.
You won’t get tax deductions on loan interest if you pay back the loan too early. Usually, interests of student loan and mortgage are tax deductible. Hence, you have to pay more tax if you pay off your loan beforehand.
When your efforts are totally focused on debt repayment, you might be overlooking other vital financial investments like paying for an emergency fund or life insurance. This way, you’re paving the way for additional financial complexities in your life.
As per Elle Kaplan, CEO of LexION Capital Management in New York City, “if you play the long game, in the end, you could be better off investing and not paying down debt.”
Invest the money which you’re paying extra on your loan toward something meaningful, such as start a business. It helps in better utilization of the cash you have.
From the above discussion, it’s clear that you must check out both the pros and cons before making early payments on your loan.