Is it better to pay off a loan sooner or later
LOS ANGELES, September 22, 2021 (GLOBE NEWSWIRE) – Getting rid of debt can be a good idea if someone has the cash flow to do it. However, in some cases, paying off a loan on time can be a better financial decision.
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 prepay a loan.
Benefits of early repayment of a loan
Positive effect on credit and future borrowing opportunities
Prepaying the loan early reduces the chances that a borrower could miss or be late on a payment. This helps prevent potential damage to the credit score.
Additionally, prepaying a loan can improve a borrower’s debt-to-income ratio, which is a measure of their monthly debt repayments relative 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 reassure borrowers. They no longer have to worry about earning enough to cover these payments or not paying and dealing with consequences, like fees and recoveries.
Disadvantages of early repayment of a loan
Less money for other expenses or financial goals
Borrowers have to increase their monthly payments to repay their loans sooner than expected. This can put financial pressure on some borrowers who may not have a large amount of money after spending.
Borrowers could also lose higher yields elsewhere. If a borrower could get a return on their investment that was greater than the interest rate on their debt, that investment might be a better option.
Penalties for early repayment
Some lenders impose prepayment penalties on loans. This means that borrowers might owe additional fees if they repay the loan early. This is disclosed in the fine print, so borrowers should check all loan terms before signing. Note that Advance America does not charge prepayment penalties.
Benefits of paying off a loan on time
Better cash flow / less financial stress
Making the minimum payments on a loan each month can free up more of the borrower’s money for their monthly expenses. Borrowers on a tighter budget might consider sticking to the loan repayment 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 more quickly, they will be less likely to go into debt if they have to pay an unforeseen expense, like a car repair or a medical bill. It can also give the emergency fund more time to earn interest.
Disadvantages of not repaying a loan early
No more money lost on interest
The more borrowers have an outstanding loan, the more interest they can pay. Paying off a loan on time can make the loan more expensive than prepaying it because the borrower pays more interest overall.
Possibility of missed or late payments
Keeping a loan longer increases the risk that a borrower will miss a payment or pay late. Not only will this incur a fee, but it could also hurt their credit score.
Should borrowers repay their loans early or on time?
Borrowers with good discretionary income might consider paying off a loan sooner if they can easily afford it, especially if it has a high interest rate. They just have to watch out for prepayment penalties. Yet these borrowers may also consider repaying the loan on time while using their extra cash to build an emergency fund or pay for other expenses.
On the other hand, the right option for borrowers on a tight budget may be to repay the loan on time. Paying more interest over the life of the debt is worth having enough money to cover essential expenses.
Borrowers must make the decision to repay a loan early or on time depending on their particular circumstances. Either option might be ideal depending on the borrower’s circumstances and the terms of the loan.
Opinion: The information provided in this article is for informational purposes only. Consult your financial advisor about your financial situation.
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