You have a loan and a little extra money. Should you pay off loans early? It’s important to understand what you get from a loan, and what it costs. You’ll save a bundle if you eliminate debt early, but it’s not always the best thing to do.
To see the potential drawbacks of paying off loans, see Early Payoff Pitfalls.
Save by Paying off Loans
When you pay off a loan, you’ll stop paying interest. Some loans drag on for 30 years or more, and you pay a lot of interest on those loans - possibly more than you borrowed. Over your lifetime you’ll keep more for yourself if you pay off loans quickly.
The tradeoff is that you don’t get to use your extra cash today. Suppose you have a large chunk of change or a few extra bucks each month; you’ll have to do without those luxuries.
On the flip side, you’ll have extra money after you pay off loans. That day will come sooner if you pay extra. Then you can use the money you would’ve spent on your monthly payment to rebuild your savings and do other things.
Pay off Loans for Financial Strength
As you pay off loans, you become more attractive as a borrower. Lenders want to be sure you have enough income to pay off loans, and that existing loans don’t eat up too much (usually some percentage) of your income. When you pay off loans, you improve your debt-to-income ratios and are more likely to get a new loan.
Peace of Mind
Some people hate debt. They pay off loans as soon as possible - even if it doesn’t make financial sense. That’s fine, as long as you know why you’re doing it. You can’t put a price on happiness. Perhaps you want to pay off loans before retiring, or you’re sick of making monthly payments. Take a look at the big picture, and make an informed decision that you can live with.