What Are the Benefits of Paying Off Your Loan Early?
Is paying off your loan early really worth it?
The right answer is YES. Paying off your loan early helps you to improve your finances and by extension gives you a good credit score.
When you take a personal loan and use it judiciously, it will give you a lot of financial advantages.
Some of the financial advantages of taking a personal loan are:
- Flexibility to use the money for whatever that pleases you unlike other types of borrowing
- Personal loans come with lower interest rate
- No collateral requirements
You can take a personal loan and use it to buy a new car or pay for your home renovation.
When you want to make large purchases, you can save money by opting for a personal loan if you have a good credit score to qualify for one instead of using credit cards.
In 2020 alone, consumers owed $323 billion on personal loans due to the impact of the pandemic on small businesses.
You can secure a personal loan for an average of 9.76% APR. But when it comes to credit cards, the interest rate can be as high as 15% APR.
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The value of the interest rate notwithstanding, you can still pay off your loan early and enjoy more benefits if you are financially disciplined and determined.
Why is Paying Off Your Loan Early a Wise Financial Decision?
You stand a chance to enjoy a lot of benefits if you are able to pay off your loan before the due date instead of allowing the monthly interest to accumulate over a long period of time.
Why people pay off their loans early varies from person to person. But generally, it’s done with the intention to save money and stop paying the interest.
Interest charges only help you to buy more time while accumulating debt for yourself. The more you decrease the amount you owe, the less interest you pay.
A super-easy to foresee the financial implication of taking a loan is through the use of a loan calculator.
How Does a Loan Calculator Help in Paying Off Your Loan Early?
A loan calculator can help you see how much interest you will be paying overtime and how much you can save by reducing your debt earlier.
When you are considering taking a personal loan to finance a purchase, you may need this awesome online tool called a loan calculator to help you understand what your monthly payments will be.
How does a loan calculator work? A loan calculator factors in things like the type of loan you intend to secure, your credit score, how much you need to borrow, and what you feel comfortable paying each month as you pay it back.
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Increasing Your Debt-To-Income Ratio Can Help You Secure More Loans in the Future
Before we talk about how increasing your debt-to-income ratio can help you get approved for more loans in the future, let’s talk about what it means.
What is a debt-to-income ratio? This is the percentage of your income that goes into paying off your debt. Lenders look at your debt-to-income ratio before they can approve you for a loan.
Your debt-to-income ratio increases when you are fond of paying off your loan early. In addition to getting a personal loan approval faster, it also comes with more favorable terms.
How to Boost Your Credit Score by Paying Your Debt on Time
One of the most amazing ways to improve your credit score is to pay off your loan very quickly.
When you pay off your debt very quickly, you demonstrate to the lender that you are a responsible borrower and as such, stand a chance of increasing your borrowing capacity within your credit limits.
You Will Enjoy Financial Relief
Paying off your loan early helps you to enjoy peace of mind. The earlier you decrease your debt, the earlier you will be in a stronger financial position.
When you pay off your debt ahead of time, you relieve yourself of stress and unnecessary pressure.
Always talk to the lender ahead of time to check the terms and conditions of your loan so as to arrive at a payment plan that will be convenient for you.
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Cons of Paying Off Your Debt Early
There’s a downside to paying off a personal loan early that most people don’t talk about. You will be seen as a more responsible borrower if you pay the interest charges of your loan at the right time instead of rushing to pay ahead.
In addition to that, if what you invested the money in will give you more interest than what you will be paying on the loan you took, it’s a wiser financial decision not to pay off your loan early.
Is there a penalty for paying off a loan early? Yes, but it depends on the terms and conditions of the lender. Some lenders charge a prepayment penalty fee.