Essential Advice About Paying Off A Loan Early
You were able to get extra money. Should you save it, or use it to pay off a loan early? That depends on your financial situation, and what kind of loan you took out.
Some people want to “quickly end their debt” because they feel ashamed about it. However, taking out a loan isn’t necessarily bad. It can actually help your credit score to establish a history of making loan payments on time.
Instead of acting on emotions, look at your finances—and listen to financial experts’ advice on paying off a loan early.
Loan Repayment Advice
Make Sure Your Monthly Expenses Are Covered
Your monthly household expenses like rent, utilities, food, transportation, bills, and other fixed expenses like insurance premiums and loan payments.
You should never miss a loan payment because it lowers your credit score. But paying higher than the monthly terms does not necessarily increase your credit score. If you put all your money into the loan, and miss other payments like rent and utility bills, your credit score goes down.
You also have to factor in inflation, and how food and transportation expenses have gone up significantly this year. These are basic needs, and you don’t want to run out of cash in the middle of the month.
In other words, when paying off a loan early, look at how it will affect the rest of your expenses.
Build Your Savings First
Financial experts agree that building a financial safety net is more important than paying off a loan early.
Emergencies can happen; people get sick, the car breaks down, and a check is late. The COVID-19 pandemic is proof of how life can change overnight, and you need to have savings tucked away.
Ideally, you should have at least 2 to 3 months of living expenses in an emergency fund. If you get a sudden windfall of cash, put it there. Continue to make your regular loan payments, since these are already a fixed part of your budget.
If you already have an emergency fund, then you can consider paying off a loan early—but only if there are significant savings.
Check If There Are Penalty Fees
While paying off a loan early can save on interest charges, it does come at a cost. Some lenders will have a prepayment penalty, especially for the first or second year. Usually, penalties decline after each successive year of the loan, so it is almost zero in the final year.
Decide Which Debt To Pay Off Earliest
If you decide to put your extra money into paying off debt, then look at your different forms of credit. Aside from loans, you may have credit cards that still have an outstanding balance. Compare their interest rates to see which one to pay first.
Look At Your Credit Score
As mentioned earlier, paying loans on time can increase your credit score, but paying off loans early may actually hurt it.
Paying loans is an opportunity to build your credit history and prove your capacity as a “good borrower.”
Credit score also considers a credit mix, or having a variety of credit lines—credit card, loan, utilities, etc. If you’re trying to build up a history, or pull up your credit score, then having a loan can actually help your financial goals.
Invest In Your Capacity To Earn
Another factor that you have to consider before paying off loans early is whether the money is better spent on improving your income-earning capacity.
“Investing” isn’t just about buying property or stocks. It can also mean investing in your skills, education, training certifications, etc. These can help you get a better job, which has a long-term impact on your financial stability.
So, if you have extra cash, consider putting some of it into getting training rather than paying off a loan early. Considering the cost of living now, and the competitive job market, this is essential for being able to support your family in the future.
Know Where To Get Emergency Cash
Sometimes you have extra cash... and sometimes you’re short. Life can go both ways, and you need to plan for emergencies too.
One way to raise money for emergency expenses is to take out a car registration loan. This is a loan you take out using a car that you are still making payments on. (When you already own the car outright, you can apply for a title loan.)
You can borrow from $200 to $1,500, depending on your vehicle model and condition.
How Do I Apply For A Registration Loan?
Fill out the form and a loan representative will call you to explain the process and answer your questions. Then, just go to one of the Southwest Title Loan branches (we have several located all over Arizona!) to show the documents.
You will spend less than 30 minutes in the branch. When the loan representative verifies the documents and approves the loan, you can get the registration loans money the same day or the next business day.
Get Started Today
Hopefully, by now, you have a better understanding of the pros and cons of paying off a loan early. While it may seem obvious, there are multiple ways to approach it. And if you are interested in a registration loan to get a sum of cash more quickly, you are also equipped for that. Reach out to us through our online inquiry form and we can help you through the rest of the process.
Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.