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.