Getting Ahead of the Game: 4 Benefits of Paying Off Loans Early
You take out loans so that you can borrow a lump sum and pay it back over time. That’s what loans are mainly preferred for. After all, around 58 percent of Americans hardly have $1,000 in their savings account. When you don’t have enough money in your account, you’ll have to borrow funds during a Financial emergency.
Nevertheless, making that last payment of your loan term feels good. But did you know there are benefits to paying off loans faster?
It’s true. You can use smarter ways to pay off loans early and reduce your stress. If you can manage to pay a little more than the minimum payment each month, you could see some serious benefits. Here’s when paying off a loan early can pay off.
1. You Pay Less Interest
Banks make money through fees and interest. While you can’t skip the fees, you can pay less in interest, which saves you money.
Let’s say you take out a $5,000 loan with an interest rate of 5 percent. If you paid a minimum payment of $150 a month for three years, you’d pay off the loan and spend $394.76 on interest. But if you tacked on an extra $50 a month, you’d cut your pay off time to 26 months (just over two years), and you’d save over $100 on interest.
Thinking about taking out a loan? Use this loan payoff calculator to see what you’ll pay each month.
2. You Boost Your Credit Score
Having too much debt can bring down your credit score, especially if you have a lot of debt compared to your income.
A loan doesn’t impact your credit score as much as revolving debts (like credit cards), but it does affect your debt to income ratio. As a result, paying off a debt by paying more than the minimum payment improves your credit score (in most cases).
3. You Feel Better
Paying off loans early isn’t just about improving your finances. It also improves your mental health and wellbeing.
Researchers say that when you have high amounts of debt, you are also more likely to suffer from higher rates of stress or even depression. And if your loan is part of poor financial decisions made in the past, you’re even more likely to experience these effects.
So put that extra few dollars towards your loan each month. It can do you a world of good.
4. You Can Start to Save Money
Few people can pay off debt and save for the future at the same time. It’s the equivalent of burning the candle at both ends, and you could end up falling further behind.
By prioritizing your debt now, you put yourself in a better place in the future by giving you more time to save down the road.
Paying Off Loans Early Can Be Good for You in Many Ways
It’s tempting to make the minimum payment over the set loan term, but paying off loans early can benefit you in ways that go beyond your account balance. The only thing you need to watch out for are lenders who charge prepayment penalties. Sometimes bearing these charges could be more beneficial than paying unreasonably high monthly payments.
Knowing that you’re paying off debt successfully can help you manage the stress that so often comes with borrowing money. Plus, you’ll put yourself in a better financial situation so that you can borrow responsibly in the future. It’s all about getting your calculations right!