Paying Off Loans Early: The Pros and Cons

It seems like a no-brainer. If you have the means, why wouldn’t you want to pay off your debts as quickly as possible?

But the truth is, paying off loans early is not always your best option. While it may solve some problems, it can also cause many others. It’s only under the right circumstances that paying off early is truly worth your while.

So, to clear up any confusion about paying off a loan early, we’ve created a pros and cons list. Read through this list to learn when you should pay off early and when it’s better to take your time.

The Pros of Paying Off Loans Early

Here are the numerous benefits of paying a loan off early.

Peace of Mind

The first benefit of paying a loan off early is peace of mind. It’s finished, done. You never have to worry about that bill again.

For many people, there’s also an emotional weight that lifts when the debt is paid. Having an unpaid debt hanging over you can be a constant stressor.

Whereas, knowing that you no longer owe that money is a constant stress reliever. Every time you think about it, you’ll remember that you finished paying it off. This also gives you a wonderful sense of accomplishment.

Financial Freedom

Plus, this decrease in monthly expenditures is basically an increase in monthly income. That is, all the money that was going to your monthly loan payment you’re now free to use however you like! And one of the most common uses for it is paying off other debts.

If you’re like most Americans, this loan wasn’t the only debt you were paying off. Many Americans are buried under so much debt, they can only make the minimum payment each month.

These minimum payments barely cover the interest accumulated each month. Therefore, they barely make a dent in the total balance.

But having one less payment per month could mean that you pay off another debt twice as fast. Then, you may finally reach a comfortable state of financial freedom and stability.

Save Money On Interest

Depending on your loan agreement, paying off early could mean paying less interest overall on the loan itself. Though this isn’t always the case. Most loans actually have the interest built into the total loan amount from the start, regardless of when you pay it off.

Still, as we said, paying off early could allow you to pay off other debts faster. If these debts accumulate lots of interest every month, this could easily save you thousands of dollars.

Build Your Savings

Another investment option for this new monthly bonus is building your savings. If you don’t have any other debts to spend this money on, good.

Don’t spend it. Save it.

Save up an emergency cash fund, holiday shopping fund, and a vacation fund. Think of something you want to invest in, like a home down payment, and save up for it.

Then, you won’t be constantly borrowing from banks and creditors to get what you need. Instead, you can borrow from yourself.

Credit Benefits

Lastly, your credit can benefit from paying off your loan early.

As you probably know, having some debt is good for your credit. But when you’re borrowing the maximum amount that your creditors will allow, it actually lowers your credit score.

Conversely, having some borrowing capacity that’s not being used (that is, filled to the brim with debt) boosts your credit score back up. Lowering your total debt amount by paying off your loan can do that.

Furthermore, missed/late payments on any of your debts are horrible for your credit score. Having one less debt bill to pay reduces your risk of this.

The Cons of Paying Off Loans Early

Now, don’t get overzealous about reaping the benefits described above. There are a lot of disadvantages to paying off loans early as well, listed here for your consideration.

Credit Disadvantages

As stated, having some debt is good for your credit. This is especially true when the debt is paid back in small payments over a significant period of time.

It shows creditors you can be trusted to borrow large amounts and that you consistently pay on time. That boosts your credit score.

Taking time to pay your loan is a great way to do this, especially if the interest is already built into the balance. In that case, paying off early saves you no loan interest, anyway. Better you pay off a different debt instead, one that accumulates monthly interest.

If you have little-to-no other debt besides this loan, leave it. It’s better for your credit to pay it off over time.

There Are Better Investments to Make

As you can see, most loans are a good debt to have. So, if you have enough cash lying around to pay it off, try to think of a better place to invest it.

How’s your retirement fund looking? Do you have money to put your kids through college?

If you’re a business owner, invest in your business. You may even consider all the money you can make by playing the stocks.

By paying off a loan early, you may blow your chance of making a better, or more urgent, investment.

You Can’t Get It Back

If you don’t have an emergency savings fund, forget about your loan. Once you pay off that loan, that money is spent, gone.

Then, what if something happens? What if you have to pay for a car accident or a funeral? Now you’ll have to borrow money all over again.

Here’s another way to look at it. When you pay off credit card debt, your reward is a big, empty balance on the card, a financial cushion. When you pay off a loan you get, well, nothing.

Penalties

Last but not least, some loans charge you penalty fees for early payoff. Always check the terms of your loan before attempting to pay off early. This includes making additional payments whenever you have some extra money.

Paying Off a Loan Early

Now you know: paying off loans early isn’t always a good idea. Remember this list, then, and consider these points carefully before you go through with it. Bookmark it for your reference and share it to let your friends know.

Now, check out Debunking Money Myths: 5 Personal Loan Myths to Know About.