To just see the beneifts of early payoff, read Why to Pay off Loans.
Alternatives to Early Payoff
You close the door when you make an early payoff. It may be the best thing to do, but you should look at all the alternatives before pulling the trigger. Instead of an early payoff, you might be better off using the funds for:
- Future needs (emergencies, retirement savings, and other goals)
- Improving your home
- Investing in your education or a business
Can You Borrow Again?
Once you do an early payoff, the money is gone. You can’t ask that the extra money be returned if you end up needing it. Unfortunately, it is difficult to borrow money when you need it most. After a job loss, you don’t have income to qualify for a loan. During an emergency, it’s hard to get cash quickly.
After an early payoff, your debt to income ratios improve - but only if you have income. If you want to be safe, you might keep some cash on hand in case you need it. Your early payoff can move as slowly as you want. Interest is the price you’ll pay for this flexibility and safety; you’ll have to decide if it’s worth it.
Giving up Benefits
Some loans have special benefits, and you lose those benefits with an early payoff. For example, you may be able to temporarily suspend student loan payments if your income falls (or goes away).
You’ll have to pay the loan eventually, and you may end up paying more than you were originally supposed to pay. However, you’ll get a bit of breathing room.