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Should I Pay Off My Loan Early?
Ask anyone what they would do if they came into extra money, and most people would probably say they’d pay off debt. If you owe money on a loan and get an unexpected windfall, such as a bonus, tax return, or birthday cash, you might want to pay off a loan early – maybe even months or years before its term ends. But is that always the best option?
Pros of paying off a loan early
There are notable advantages to repaying debts ahead of schedule. For starters, when you pay off a loan early, you can:
Save money
Repaying your loan early can save you money on interest fees. Depending on your interest rate and loan amount, this savings could amount to hundreds or even thousands of dollars! You can then use the money you would have spent on interest to work toward other financial goals.
Improve your financial health
Paying off a loan early means you’ll have less debt. Having less debt improves your Credit Utilization Ratio, which can increase your overall credit score. Not only that, but having less debt can free up more money for savings, investments, and the things that make you happy.
Gain peace of mind
When you pay off a loan early, you won’t have to worry about budgeting for that monthly payment. This can alleviate a lot of stress if you lose your job or face another unexpected financial hardship.
Cons of paying off a loan early
In some cases, there may be drawbacks to repaying a loan early. Depending on your loan agreement and financial situation, you may:
Face penalty fees
Some lenders charge prepayment penalties for paying off a loan early. A prepayment penalty may be a percentage of the loan balance or a flat fee. Lenders do this to make up for losing the interest you would have paid over the loan’s original payment term.
Fortunately, many lenders – including Advance America – don’t penalize you for paying off a loan early.
See your credit score drop
If you don’t have any other credit accounts aside from that single loan, paying it off early may cause your credit score to go down.
Having a loan contributes to several different factors in your credit score, such as your credit mix, credit utilization, and length of credit history. If you repay the only debt you have, then you no longer have an account the credit bureaus can use for credit scoring. So, unless you have other active credit accounts, you may want to keep making regular loan payments to establish a payment history.
Have less money for other expenses
Putting extra money toward an early loan payoff can reduce the amount you have for emergency savings and monthly expenses. Before paying off a debt ahead of schedule, ask yourself if doing so will make it difficult to afford necessities like housing, groceries, or utilities.
Should I pay off my loan early?
It’s not always a cut-and-dry decision when it comes to paying off loans early. As with any financial decision, you should carefully weigh the pros and cons, review the loan terms, and assess your budget. In some cases, paying off the loan early makes sense. In others, you might benefit more by paying down a debt with a higher interest rate or balance.
In most cases, however, paying off your loan early can save you money over the life of the loan and improve your financial health.
Advance America welcomes early loan repayments
At Advance America, you won’t face prepayment penalties on any of our personal loans. When you need extra funds, we offer loans designed to meet different financial needs. Whether you apply for a Payday Loan, Installment Loan, or Line of Credit, you can get the money you need as soon as today – and you don’t need good credit to get approved.
Visit us in-store or apply online now.
