Pros and Cons of Paying your Installment Loans Early

Pros and Cons of Paying your Installment Loans Early

Having debts over a long time can be expensive and stressful. That is why, in some cases, paying off a loan as soon as possible may seem to be the wisest decision to make.

At other times, a change in the financial condition would prompt you to pay back your loan earlier than expected. Perhaps, you received a bonus from work or received a significant sum from your inheritance. In these cases, paying back the money early would make a lot of sense. It will take a lot of load off your back if you get rid of monthly amortizations on loans.

While it may seem like paying loans early is a no-brainer good idea, there are also drawbacks to it. There are a lot of factors one should consider before asking for a payoff.

To help you determine whether or not you should pay your loan early, we have gathered in this article, the pros and cons of paying your installment loans early.

Pros

Here are the advantages:

Peace of Mind

Eliminating one monthly obligation off your back can have a huge impact on our mental health. It helps reduce stress and improve our well-being. You do not have to worry anymore about making monthly amortizations on time. You will finally have peace of mind and relief from the burden of any obligation.

Savings on Interests

In some cases, paying off loans early equates to paying fewer interest payments in the long run. Consequently, you will be saving up a lot of money from paying long-term interests. This is especially true when you have loans that have higher interest rates. However, this may not always be the case.

Increase Your Net Worth

When you reduce your liability, it will result in a higher net worth. Aside from that, this will result in improving your debt ratio. This means you will be more attractive to investors and other lenders, especially when you are taking in new opportunities. Perhaps, when you have a pending loan application with another bank, you will have a higher chance of getting approved because you have a significant net worth.

Build Character

Paying debts early would show lenders that you are a good payer. It will help you build your character, which enables you to obtain better terms in future loans.

Cons

While paying early has undeniable good effects, it also has some drawbacks:

Credit Score 

While it may be true that paying off your installments early will not hurt your credit score, doing so could not do any good to it either, especially when you have only made a few payments yet. Experts in the field strongly advise borrowers to keep their accounts open for the life of the loan to improve credit score, rather than hastily paying it.

Better Use of Money

Depending on the type and amount of your debt, paying it all off may cause you a considerable amount of money. On a different view, you may be better off if you invest this amount of money instead of using it to pay off a loan that is not yet due or is not that burdensome. 

Perhaps, you can spend your money in highly income-generating activities rather than paying a low-interest loan. Consider investments that would derive higher interest savings than those you may obtain from paying off a loan early.

Possibility of Future Liquidity Problems

While paying off your debt early may seem like a good idea at the moment, this does not mean you will not regret it later on. It will be possible that early payment will harm your financial condition later on. 

It could be that you might need immediate cash later on, and you have already used up available funds on paying off your loan early. It is still best to weigh your choices before becoming aggressive to pay your debt. Remind yourself to always keep liquid funds with you. Otherwise, it will create cash flow problems in the long run. 

Missing out on Perks

In building credit, having debts is quite essential, especially for young borrowers. Hence maximizing your debts and making timely payments can be very helpful in building a strong credit history. Along with a good credit history are other perks that come with having a loan, like more accessible payment terms in the long run or freebies and the like. When you let go of a loan early, you are also letting go of these opportunities.

Payout Penalties

In some loans, you will earn interest savings if you pay it off early. However, for some loans, there may be early payout penalties that will apply. These penalties are usually high and are unnecessary. As such, before you decide on paying off a loan early, carefully review your loan policy and discuss with the banks’ representatives on whether it is worthwhile to pay off your loan early.

Takeaway

Indeed, having debts can take a lot of toll on your savings, which is why some would opt to pay off loans as soon as possible. Fortunately, with all that is said above, you know now that it is not always the wisest decision. There are factors that you have to consider before choosing to pay off a loan early. That decision is still a case to case basis. Hence, it would be best to evaluate first the pros and cons of your option before diving right into it.