A loan is a great way to get something you might not otherwise be able to afford. Whether it’s for a car, a home, or even less costly items, sometimes a loan is a necessity more than a convenience. Regardless of the reason for borrowing money, it’s crucial that you repay your loan on time, but it can also be a great idea to pay off a loan early.
Depending on the type of loan you have, an early loan payoff might not always save money, but it’s rarely a bad idea. The psychological benefits alone are well worth the effort, but in many cases, you’ll also save money on interest. Paying a loan off early also has a great effect on your credit report and FICO score.
How can I pay less interest on my loan?
The mention of saving money on interest for your loan probably piqued your interest. If you pay off a loan early, whether in full or by making extra payments, you essentially stop paying interest on that money over a longer period.
In some cases, such as with a mortgage, you’re essentially just buying yourself time because the loan amount is so large. With a mortgage, there are benefits to paying it off early, but check your terms and talk to an accountant to learn all the pros and cons.
With credit cards and other forms of revolving debt, it’s always beneficial to pay those back as quickly as possible. Unlike a mortgage which buys you time, credit card debt only buys you more debt when it goes unpaid. Every month you don’t pay off your balance is another month you’re adding interest to the money you’ve borrowed and dealing with compound interest.
Credit card “loans” can be a never-ending cycle of debt if you’re not cautious, so paying those off early is always beneficial—when you’ve got the money available.
How can I pay my loan off early?
Installment loans and personal loans generally have set terms. Unlike credit cards, you continue to make set payments on these loans to slowly pay off your debt. But you don’t have to wait the full term of the loan if you can pay it off early, allowing you to put that money elsewhere.
One way to achieve an early loan payoff is to simply pay more than you’re required. In some cases, this can be done by making additional payments, along with your set, recurring payments. But be sure to check your loan agreement for any restrictions or potential fees.
Another way of paying off a loan early is with a single lump-sum payment. Before just writing a check for the loan amount, check your account online or call a loan representative to get your exact payoff amount. It could potentially be less than you think when decreased interest payments are taken into account, or it could be slightly higher if you’re faced with early repayment fees.
Even if there are fees, the pros will often outweigh the cons, as you’ll potentially be debt-free and receive a nice boost to your credit score which will make it easier to get better rates in the future.
Are there any drawbacks to early loan payoff?
As we already mentioned, the pros will outweigh the cons in most cases, but there are things to watch out for when considering an early loan payoff. The main drawback for many people will be the lack of “extra” money while they’re making larger payments. In some cases, that might mean setting a new budget and reducing other activities or not putting as much into savings until the loan is paid off.
It also depends on the type of loan you have. With high-interest credit cards, payday, or title loans, it’s hard to consider any drawbacks. With student loans and possibly with your mortgage, early payoff might mean you lose out on tax benefits and other advantages, so thoroughly research your decision on those types of loans.
We already mentioned that some loans might have an early payoff fee, and while that would be considered a drawback, it can often be outweighed by all the benefits.
What are the real benefits of paying off a loan early?
Yes, there’s the potential for saving money on interest by paying a loan off early, but there’s another savings benefit. Although it might be harder to put money aside while you’re making larger loan payments, when the loan is paid off, you can continue putting those same payments into savings and earning interest on the money.
You’ll already be programmed to make the payments, so just stick with the same schedule and watch your savings start to grow!
A few good things will happen to your credit when paying off a loan early. Your debt-to-income ratio will become much more favorable, which looks great on your credit report, let alone the positive effect it will have on boosting your credit score.
Obviously, after paying off a loan early, it’s a good idea to build savings and avoid debt, but the improvements to your credit report and FICO score will mean much better loan opportunities in the future. A good credit score will mean good interest rates, and a strong credit report will open up your choices of lenders considerably.
The boost to your financial health from getting out of debt goes without saying. It might sound like hyperbole to say that it’s also good for your overall health, but it’s true. Paying off debt is great for your health. There’s a certain peace of mind that comes with living debt-free which reduces stress significantly, and that’s good for both heart health and mental health.
Are there loans with no early payoff fees?
The only way to be certain of whether or not you’ll be faced with early pay-off fees is to check the terms of your agreement or call a representative. Generally speaking, yes, there are loans with no early pay-off fees but check first.
Large installment loans often won’t have early pay-off fees, but some smaller personal online loans will. Other personal online loans, like those from Helix by Bank of Orrick don’t have fees for early repayment and will save you money on interest payments.
Plus, applying for a personal loan from Helix is easy and quick. Once you apply, you’ll get a decision in seconds and your money will be deposited within one business day.