None of us want it and most of us have it hanging over us in some form or the other.
Debt. It’s the elephant in the room!
If you’ve got a loan and you’d like to shed your debt load as soon as possible, does it make financial sense to pay it off early?
Or is it better to wait out the term of your installments?
All of us would ideally like to be debt-free. Certainly paying off your credit cards as fast as you can makes good financial sense. However you should consider carefully the options available in dealing with repayment of other kinds of debt.
Have You Put a Contingency Fund in Place?
Before you think of the big payout, stop and think. Do you have a six month emergency fund stashed away to take care of unforeseen expenses, or are you living from paycheck to paycheck? Before you think of paying off that loan early, take steps to ensure that you have an emergency fund.
What Sort of Interest Rate Does Your Loan Have?
Credit cards have the highest interest rates, so deal with these first. Auto loans, home loans and student loans carry a lower rate of interest. First calculate how much money you’ll be saving if you pay off one of these early. Next calculate how much extra money you have to allow you to make an early repayment.
Now add up how much you’re paying in interest on the total amount and whether you will be saving by adding that extra amount to your loan and paying it off early.
There are mortgage and student loan interest calculators available online that can help you get started. Once you’re done, calculate how much interest that extra amount will generate in interest if you put it into a CD, or any other form of savings account that gives high yields.
If this adds up to more than the amount you’ll pay to clear the loan, perhaps you should continue with the loan and invest in the CD. The money you earn here can then be used to pay off the loan at a later date and you’ll still be ahead.
Some Loans Have Prepayment Penalties Attached to Early Repayments
Check to see what penalties there attached to early repayment of your loan. If there are fees attached, check to see whether these will be more than the interest you will be paying on the loan in the long term, or less, before you decide.
Will Early Repayment of Your Loan Affect Your Taxes?
If you’re paying a mortgage or a student loan you are probably getting a tax deduction on these. Get advice to find out whether your tax savings are more than the interest you will be paying in the long term.
Take time to assess the situation before you decide. Take advice where necessary to make sure you’re getting the best options available.