There are times in life when circumstances put us in a financial pinch and lead us to take out a personal loan. It could be a medical emergency, family crisis, or to consolidate debt. If, however, your situation improves and you find yourself with some extra cash available, you might be thinking about paying off the debt earlier. Lenders such as Upstart, Avant and Prosper charge no extra fees for early repayment of loans. However, not all loan companies allow early repayment, so check if your lender charges a penalty fee to end a loan early.
If you are weighing this decision, here are three reasons why settling your loan early is in your favor.
Overall Reduction of Loan Cost
When purchasing on credit, the interest rates charged mean that the amount paid is higher than the original cost. A loan of $5000 may end up costing you between $5500 and $6000, depending on the interest and length of the term. A longer term over five years means lower monthly installments, but you pay much more in interest in the end. Less is definitely more in this case! A shorter term of one year means higher monthly installments, but your overall cost of the loan is lower. By either paying larger monthly installments or settling the full amount early, you incur much less accumulated interest fees, which in turn reduces the overall final amount of the loan.
More Disposable Income
Once you pay the loan balance, there is no longer a monthly installment obligation dragging you down like a millstone around your neck. This means more money at the end of your month — you now have wiggle room. That is a huge weight off your shoulders if you have crawled from paycheck to paycheck. There is more money at your disposal to use as you like. You could choose to spoil yourself with that something special you have desired for a long time or finally take a long-awaited trip abroad.
Increasing Your Savings
With more disposable income to direct elsewhere, the sensible choices will include paying off any other debt or plowing the money into your savings. Financial experts all agree that part of our income should go toward an emergency fund for any unexpected crises that may arise, like a prolonged illness, loss of a job, or major car or home repairs. Ideally, you should have enough in your emergency fund to tide you over for six to 12 months in case of a loss of income. If after that you still have some extra income available, then consider investing some money. Speak to a financial advisor about the best investment options that suit your profile, or you could funnel more money into your retirement savings. Whichever way you choose to channel extra cash, saving for a rainy day is always a good idea.
All of us face debt at some point in our lives – from student loans, auto loans to home loans. It’s a necessary evil. What’s important is how we manage it. Try and keep debt under control and cut as much of it as you can. Taking steps toward clearing debt means taking one step closer to freedom.
