If you have ever taken out a loan, you know it can take years to pay off the debt. That’s the bad news right, but there is good news if you have some extra cash at your disposal. So, is it a better idea to pay off your loans as quickly as possible, or drag it out by just paying the monthly installment?
There are pros and cons to paying off a loan early, but let's look at the benefits.
One of the best reasons to pay off your personal loan early is it saves you money and interest. In a nutshell, the interest means that your repayments take longer. Long-term loans like a bond can take between 25 and thirty years to pay off. The interest adds up over time.
Short-term loans may be shorter, but the interest rate is always that much higher and is usually quite expensive. Paying the minimum on such loans is not the best idea. A good idea is to pay off your higher interest loans faster than the low-interest loans.
If you have a bad credit score, then it's highly unlikely that you will get a loan. Get your credit score first and see where you can improve.
After you have paid off your debt, you will be in a financially stronger position, as the money you have been paying monthly will now be available to you for other uses.
Another important aspect of paying off your debt is that if you need another loan or finance, the lender will see that you do not have any existing loans and when they do their debt to income calculations, your chances of getting approval are higher.
Paying off your debt will have a positive impact on your overall credit score. Part of your credit score is based on how much you are borrowing. If you have borrowed too much and your credit is maxed, your credit score will be lower, therefore paying off your debt timeously will give you more leeway when to comes to applying for more credit.
Let's face it, nobody likes to have debt, the quicker you can pay off your debt, the quicker you can free up extra funds. Instead of the grind of monthly payments with interest, you can put the extra cash to good use, by putting them in a savings account or a retirement policy. The choice is yours and the freedom of being debt free affords you this opportunity.
So yes, paying off your loans as quickly as possible is a good thing, but of course, the challenge is not to pay off the debt and then immediately apply for more loans or finance.