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  1. #1

    Should You Pay Off a Loan Early?

    Have a loan and are curious if you should pay it off early? Well the quick and easy answer is yes. And no. Confused? Don’t worry it isn’t as complicated as you might think, but there are several things you should think about before paying off a loan early.

    Before you get out your checkbook consider the following:

    1. Loan type. What type of loan are you thinking about paying off? Student loan, mortgage, car loan etc. If you’re thinking about paying off a student loan, you might want to consider loan forgiveness plans first. Some federal loans are eligible for loan forgiveness after a period of time if you work in certain health or human services professions in under-served areas.

      Some employers offer to pay off a portion of employees’ student loans after a period of service to the company. Before you pay off a student loan check to see if you’re eligible for any type of loan forgiveness or loan repayment programs.

    2. Interest rates. Depending on your financial planning strategy, it may make sense to temporarily keep loans with low interest rates while you pay down loans with higher interest rates. For example: imagine you inherit $5000 from a wealthy relative and are trying to decide how to best spend the money. Probably your decision will involve examining the interest rates on each of your outstanding debts.

      To make the best use of the money, think about how much of a “dent” you can make in your overall debt load vs. how much you’ll pay in interest. Imagine you have two options, pay off a $5000 car loan with a 5% interest (early and in full) or pay $5000 towards a $7500 credit card debt with a 22% interest rate. Instead of paying off the car loan early, you decide to pay down the credit card debt to avoid paying a significantly higher interest rate on a larger sum of money.



    3. Credit Rating. You’ll also want to consider the impact on your credit score before paying off a loan early. If you’re in the process of making a large purchase, like a home or a car, paying off a loan early can decrease your credit score. Although it may seem counter-intuitive, paying off debt slowly over a period of time is actually better for your credit score than paying off debt early.

    4. Penalties. If your lender imposes fees or penalties for paying off a loan early, you’ll want to weigh the pros and cons of paying off the loan early. If the amount of money you’ll save in interest payments is greater than the penalties you’ll pay, by all means, pay off the loan early. If you’ll end up paying more in fees and penalties than you’ll save in interest, you might want to consider keeping the loan until its scheduled payoff date.

    5. Emergency Fund. If paying off a loan early will leave you without an emergency fund, you might want to build up the emergency fund before you pay off the loan. Imagine you pay off that car loan early and you have a minor medical emergency that your health insurance won’t cover. You may face the risk of going back into debt if you paid off your car loan early and don’t have any money left over to handle potential emergencies.

    Ultimately, paying off debt early is usually a good thing. Most folks who pay off loans early are pleased with their decision to get that debt out of their lives. Just make sure that you think about your whole financial picture first. With prudent planning and due diligence, early loan repayment can be a great decision that helps you build a strong financial foundation for future success.
    Last edited by CreditDave; 05-30-2013 at 01:20 PM.

  2. Should You Pay Off a Loan Early?
  3. #2
    All excellent points just wanted to add my 2 cents. Most people don't realize that in many situations paying off your loan early will not help your credit, and may even hurt it depending on your situation. So it's important to do it for the right reason, which is removing the overwhelming burden on your life that debt can cause, just don't expect a huge jump with your credit.
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  4. #3
    Quote Originally Posted by Frugal Mom View Post
    Most people don't realize that in many situations paying off your loan early will not help your credit, and may even hurt it depending on your situation.
    Great point!

  5. #4
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    I didn't know that there could be penalties for paying off a loan early. Not that I'm in a position to pay off all of my student loans all at once anyways, but its scary that there's a penalty for doing that.

  6. #5
    Quote Originally Posted by byedebt View Post
    I didn't know that there could be penalties for paying off a loan early. Not that I'm in a position to pay off all of my student loans all at once anyways, but its scary that there's a penalty for doing that.
    Not all loans have a penalty for early repayment. Just check with your loan company before you pay the loan off in full. Also make sure that if you're sending in extra payments you're indicating on your check or money order that you want the money you're sending to be applied directly to the principle only (not paying ahead and using payments towards future interest).

  7. #6
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    Quote Originally Posted by DebtSurvivor View Post
    Not all loans have a penalty for early repayment. Just check with your loan company before you pay the loan off in full. Also make sure that if you're sending in extra payments you're indicating on your check or money order that you want the money you're sending to be applied directly to the principle only (not paying ahead and using payments towards future interest).
    The only way I'd pay them off all at once would be if I won the lottery! I will check and see, though. That's crazy that they keep extra money for future interest that hasn't even accumulated yet.

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