Pros and Cons of Early Loan Repayment
Early Loan Repayment: How to Approach and Handle itYouâ€™re probably wondering, so can I repay my personal loan early? The short answer is yes. To set our scene, a lender has loaned you money at an agreed upon amount, terms and time. During this time frame, youâ€™re required to pay them back in monthly payments. Because of the size of most loans, repayment plans generally take 10 or more years to complete â€” for some, this is a long time to be constantly in a debt trap. Sometimes the feeling of paying just slightly more each month is reassuring enough that youâ€™ll sleep better at night. Early loan repayment occurs when an individual decides to pay back significantly more than required by their agreement terms so that the loan repayment will be completed sooner. This often happens when people come into some money they werenâ€™t expecting or receive raises, or acquire new jobs with better pay.
Pros of Early Loan RepaymentLetâ€™s explore the pros and cons of this decision involving early loan repayment & how it affects your financial situation overall. Some of the most notable pros and cons are listed below. While there are many more to take into consideration, these are the most influential ones across the board.
Saving MoneyThe big one: saving money. Since loan agreements tend to include some inflation rate on payments, paying off your loan early eliminates the chance of inflation to creep higher. Youâ€™ll pay off the loan as it currently stands in your agreement. Future inflation rates will fall away. This is one way to save a lot of money on what you would eventually be paying to the lender in the future. Inflation adds up, so itâ€™s definitely a pro to be able to avoid as much of it as possible.
Early Stress ReliefWith the sweeping away of debt comes the sweeping away of stress it brought to the borrowers themselves. Being able to completely pull oneself out of debt faster than expected is a sure way to a more stress-free existence. Being free of money related worries is one of the best feelings in the world and itâ€™s understandable why an early loan repayment would be preferable in this regard.
Loss of Debt BenefitsOne of the benefits is the building of good credit score. By now consistently paying off your loan slowly over time, youâ€™re accumulating a positive credit report that will be beneficial later in life. This is particularly relevant for students who are entering loan agreements early in life. By showing their ability to succeed in this kind of financial deals, theyâ€™ll earn better credit benefits for later in life.
Loss of Investment OpportunitySometimes receiving a lump sum of money is better to invest elsewhere instead of paying off your loan. You might think that getting rid of your debt is the smartest move. More often than not, taking the received sum of money and placing it into an investment account where it can gain interest will outperform the amounts youâ€™re paying on loan interest.
Some Questions To ConsiderBefore paying off your loan early, ask yourself:
- Do I gain value from maintaining a consistent credit repayment for the next couple of years?
- Do I fully understand the implications of the specific loan at hand? (For example, what happens when you pay off a car loan early?)
- Does being in this loan set me up for an opportunity for greater loan benefits in years to come?
- Is my credit status important to me and do I want the best possible score available?
- Does paying off a loan early hurt my credit score?
Risks VS Benefits of an Early Loan RepaymentOf course, there are some risks and benefits to be noted when considering an early loan repayment. One of the most significant risks is that youâ€™ll have acted irrationally and with haste & will land up needing that lump sum repayment money for something else of far more importance. It should always be noted that you canâ€™t ask for money back from a lender. This is the biggest risk with paying off a loan early: the possibility that the money could have been better spent elsewhere. The benefits of early loan repayment are obvious. The peace of mind that comes with no longer being indebted to another person or establishment is definitely a preferable state of life. Whatâ€™s more, if the early repayment with a lump sum of money works out, and you donâ€™t encounter any financial problems in the near future, then you ultimately made the right decision!
The Procedure of Early Loan RepaymentIf youâ€™ve made the decision to go forward and pay off a loan early, there are a number of routes to take to get there.
Send Money!Whether itâ€™s a lump sum or simply a large profit, send it directly to your lender and let it be done with. Being disciplined in this regard can be tricky, as the mind wanders to other things that you could potentially use the cash for. If your goal is to pay off your loan early, then send the money. Itâ€™s as simple as that and the surest way to get you to your goal as efficiently as possible.
Add One PaymentIf early loan repayment in one lump sum isnâ€™t possible, but youâ€™d like to get out of your agreement earlier, then adding one extra payment per year is another way of getting there. Many people do this by dedicating their 13th cheque at the end of each year solely to loan repayment. In the long run, doing this can shave a year or two off of the total loan repayment period and get you in the clear slightly faster. Moreover, there are other proven ways to earn fast cash.
Bi-weekly PaymentsChanging your repayment scheme from monthly to bi-weekly can make a big cut to the total repayment time of the loan. It wonâ€™t be as big of a difference as some of the other payment options but will certainly cut a significant period of repayment time off your loan.
ConsequencesSuccessfully getting your loan repaid early comes with the very welcome consequence of no longer being under the ball and chain that is debt. Sometimes debt consolidation is a good option for some people for their financial freedom. It should be noted that one of the most significant consequences to come from early loan repayment is, on occasion, an early repayment fee that will be enforced by the lender. Since youâ€™ve chosen to pay off your loan early, the lender will be losing out on months, or years, worth of interest. Sometimes an early repayment fee is charged so that the lender still benefits from the loan. Youâ€™ll have to discuss these terms with your lender upon deciding to early repay. Usually, a paying off personal loan calculator can help give you an idea of what to expect.
ConclusionBefore jumping into the decision to pay off your loan early be sure to consider the nature of the investment that youâ€™re in and the pros & cons that would come with your decision. Itâ€™s not for everyone, but it can be for some. Get familiar with your loan and prepare a debt management plan today so that you can make the best decision for your repayments tomorrow!
Alice was born and raised in Compton, California. Then she studied at Yuin University, the place where she became passionate about researching the thin ropes between money and meaning. She is insatiably interested in peopleâ€™s potential, wondering why some succeed and others donâ€™t. Thus, the articles on her blog explore a multitude of seemingly unconnected things: money, psychology, entrepreneurship, creativity, spirituality, philanthropy, just to name a few.