LOS ANGELES, Sept. 22, 2021 (GLOBE NEWSWIRE) -- Getting rid of debt can be a good idea if someone has the extra cash available to do so. However, in some cases, paying off a loan on time can be a better financial move.
There are a few pros and cons to each strategy that borrowers should weigh before making a decision. Here are some things to consider when deciding whether borrowers should pay off a loan early.
Pros of paying off a loan early
Positive effect on credit and future borrowing opportunities
Early loan payoff reduces the chances a borrower might miss or be late on a payment. This helps prevent potential credit score damage.
Additionally, paying off a loan early can improve the borrower's debt-to-income ratio, which is a measure of their monthly debt payments compared to their monthly income. A lower debt-to-income ratio can help borrowers get approved for mortgages and other large loans.
Peace of mind
Paying off a loan can give borrowers peace of mind. They no longer need to worry about earning enough to cover those payments or failing to pay and dealing with the consequences, like fees and collections.
Cons of paying off a loan early
Less money for other expenses or financial goals
Borrowers must increase their monthly payments to pay down their loans ahead of schedule. This can put a financial strain on some borrowers who may not have a large amount of money after expenses.
Borrowers could also lose out on higher possible returns elsewhere. If a borrower could earn a return on an investment that's higher than their debt's interest rate, that investment may be a better option.
Prepayment penalties
Some lenders charge prepayment penalties on loans. That means borrowers could owe an extra fee if they pay the loan off early. This is disclosed in the fine print, so borrowers should check all the loan terms before signing. Note, Advance America does not charge prepayment penalties.
Pros of paying off a loan on time
Better cash flows/less financial strain
Make the minimum payments on a loan each month can free up more of the borrower's money for monthly expenses. Borrowers on a tighter budget might consider sticking to the loan's payment schedule.
More money to build an emergency fund
Borrowers who pay off their loan on time may have more funds available each month to add to their emergency fund. By building up an emergency fund faster, they'll be less likely to go into debt if they have to pay an unexpected expense, like a car repair or medical bill. This can also give the emergency fund more time to earn interest.
Cons of not paying off a loan early
More money lost to interest
The longer borrowers have an outstanding loan, the more money they may pay in interest. Paying off a loan on time can make the loan more expensive than paying it off early since the borrower is paying more interest overall.
Possibility of missed or late payments
Keeping a loan longer increases the chance that a borrower could miss a payment or pays late. Not only will these incur fees, but it could also hurt their credit score.
Should borrowers pay off loans early or on time?
Borrowers with a good amount of discretionary income could consider paying down a loan early if they can easily afford to — especially if it has a high interest rate. They only have to be careful of prepayment penalties. Yet, those borrowers can also consider paying the loan off on time while using their extra cash to set up an emergency fund or pay for other expenses.
On the other hand, the right option for borrowers on a tight budget may be to pay off the loan on time. Paying more in interest over the life of the debt is worth having enough cash to cover essential expenses.
Borrowers should make the decision to pay off a loan early or on time based on their unique circumstances. Either option could be ideal depending on the borrower's situation and loan terms.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
Contact: carolina.darbellesv@iquanti.com
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