In most cases, paying off a loan early is a good thing. Doing so can be beneficial for a few reasons, you will pay less interest for your loan, you’ll have less debt to worry about, freeing up your income, and you may see an increase in your credit score.
Generally speaking, the longer you have a loan, the more likely your interest rate will be higher. So, paying off your loan early can really help you save on interest rates. However, not all lenders will allow you to repay your loan early without a fee. And so, keep that in mind if you are trying to do so.
Another huge benefit that comes with paying off a loan, such as a personal loan, early is that you will no longer have to worry about the debt. Think about all the bills you pay each month, with a loan paid off, that is one less thing to worry about. With that monthly payment gone, you’ll have more money which you can use for all kinds of things. You can pay off other debt, save that money, put it towards a goal, or spend it on yourself!
The last benefit you may see is an increase to your credit score, depending on how much you paid off. Credit utilization is a pretty large factor in determining your credit score. It is the ratio between the amount of debt you have to the amount of available credit. Keeping it lower than 30% will help your credit score. And so, if paying off your loan means a lower percentage, then you could see a boost in your score.
The only times you should think twice about paying off your loan early is when there is an early payment fee or if paying off your loan means financially struggling. If there is a fee you must pay for early payoff, consider how much it is against the money you would save on interest. For some, paying extra to be debt free may be worthwhile. When it comes to affordability, you will want to make sure that you can afford to pay off your loan comfortably! The last thing you want to do is pay off your current loan to find you are struggling, and need to borrow money again.