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Should I Repay my Loan Early?

When we have a loan, we can often feel rather worried about it. Not just the stress of just being in debt but the fact that we would like to get rid of it so that we have more money for other things, rather than having to pay out on interest all of the time. It is possible, in many cases to repay the loan early, but is it worthwhile?

Costs of repaying a loan

Many people do not realise that if you want to repay a loan, then there may be costs involved form the lender. These can be called an early redemption fee and they range massively in price. For example, you may just have to pay a month’s interest or a few hundred dollars or you may have to pay thousands of dollars. It will all depend on the lender. This means that before you consider repaying your loan, you need to check with the lender as to whether there will be any fees to pay. You will then need to do some calculations. You will need to work out how much money you will save in interest if you repay the loan early and whether it will be more than the fee that you have to pay. If the fee is dearer than the interest you will save then it is not worth paying the loan back early. However, if the fee is smaller than what you would pay in interest if you kept the loan, then you will still save money if you repay early.

It can also be worth to find out form them whether you have to repay it all in one lump sum or whether you can make small overpayments, perhaps paying in a bit extra each month on top of your normal repayment or dripping in bits of money as you get them, maybe just a few dollars at a time. Find out what they allow as this will determine whether you decide to repay early and how you decide to do it.

Some people do worry that if they repay the loan early and therefore either use up their savings or reduce their ability to save, that it could leave them short of money in the future. This is true, but it is worth the risk If you are short in the future then you could get another loan. However, if you are not short of money in the future then you will not need another loan and you will have saved a significant chunk of money. Even if you do need another loan it may not be as expensive as your current loan anyway and there is a chance that you will still save money.

Benefits of repaying a loan

Loans usually have interest charged monthly. Every month that you are outstanding with the loan, you will be charged interest on the amount of money that you owe. This means that if you owe less money then the interest will be lower. Therefore, if you overpay the loan or repay it all in full early, you will save a lot of money in interest. This can add up to be quite significant, particularly if interest rates are high or if you manage to repay a significant chunk of money.

You can benefit further as well if you start to put the money that you would have been paying off the loan with into a savings account, once the loan is paid off. You can take advantage of the habit you have got into of paying out this much each month, but instead of it going to a lender, it will be making money in interest for you and be there in case you need money for an emergency in the future. If you let the interest accumulate in the account you can build up quite a good sum of money.

Paying the loan off early can also look good on your credit report. This means that if you want a big loan, perhaps to buy a home, then you will be able to show that you are very capable of managing a loan. A good credit report will not only help you when you are looking to borrow money but also if you want to rent a home and other similar situations, so it is in your advantage to make it look as good as possible.

Having this debt cleared should also make you feel better as you do not have to worry about finding that repayment each month.  Some people get really stressed when they owe money and there can be a big feeling of relief when a debt is repaid. You will also have that money spare, which if you do not decide to save, you can spend on other things. Perhaps things that you have been waiting to buy because you have not had the money available previously.

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Is Using an Overdraft a Good Solution to Making Ends Meet?

If you have trouble making ends meet each month then you may feel that using your overdraft is the best solution. Although it will help you get the money that you need, there may be better alternatives and it is best to think about these before you decide what to do.

Overdraft

An overdraft allows us to draw money form our checking account even when we do not have any there. It is arranged with the bank and they will set a limit so you will only be able to borrow a certain amount and the bank will set different limits depending on how long you have been a customer and what your credit rating and salary are like. The overdraft will be automatically paid off as money gets paid into your account. It can be very convenient.

Overdrafts can be expensive though. When you go overdrawn there tends to be a one-off charge and then you will also be charged interest on what you owe. If you have an unauthorised overdraft, meaning that you borrow more than the bank has agreed to let you have, it can be even more expensive. It is possible that you might then be charged a higher rate of interest and you could have a fee charged every day that you are overdrawn. This can allow you to accumulate debt very quickly. As you can see, it can be a costly business and so it is important to be aware of the charges that you will have to pay and how much you are authorised to borrow. This should help you to be able to think about whether this is an option that will help you or whether it will just cause more financial stress in the long-term.

Credit card

A credit card is an alternative in the sense that you can borrow smaller sums of money than many other loans. You can draw cash using one but there is a high charge for this and you would normally just use the card when shopping. The cards provide a certain amount of interest free credit, as you will not be charged interest until a period of time after you have bought goods on it. If you repay the balance in full then you get charged no interest at all. If not, you have the option to just repay a small part of what you owe but you will be charged interest on what is remaining. If you are slow to repay then the interest can really add up, but if you repay it quickly then it can be cheaper than an overdraft. However, it will take time to apply and get a credit card so unless you already have one you may need to use the overdraft if you need the money quickly.

Other loan

There are other types of loans which might also be able to provide you with some money in order that you can manage. They will also all have costs and you will need to repay them. If you are using the loan to help you afford the things that you need then you will be unlikely to have anything left to be able to afford the repayments. This is an important consideration as you will need to repay the loan and its costs and you should plan on how you will do this even before you take out the loan. Many loans will also only lend you large amounts of money which might seem like a great thing, but it will mean that you will repaying them over a longer period and will therefore be paying out more in interest.

Budgeting

As an alternative to borrowing, budgeting could be a better answer. This means that you think about how much money you have coming in and how much you need to cover your bills. Then you make sure that you do not spend too much money so that you will always have enough left to pay the bills. If this will not work because you do not have a high enough income, then you will need to think about trying to earn more money so that you can cover the shortfall that well. A loan should always just be a temporary solution as your debt will build up and up unless you can think of a way to be able to repay it.

So, although an overdraft can be a good temporary solution; albeit an expensive one, it is not something that you will be able to rely on long term. This is the same for all loans and so you will need to come up with a more long-term solution. It is worth checking what you are spending to see whether you can cut down anywhere and therefore manage without borrowing. If you cannot then you will have to look for ways to increase your income so that you can afford everything that you need to.