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In order to decide what is best for you, start by evaluating the benefits you are getting from the debt, and then measure those benefits against the cost of keeping the personal loan. Often, you save money by paying off your debt early; however, you may have other valid reasons for choosing an alternative route.
Further in the article, are mentioned the benefits of paying off your debt early. However, there are possible drawbacks that you should be aware of.
The best reason to pay off your personal loan early is to save money and stop paying personal loan interest rate. Some loans drag on for years and the personal loan interest rate adds up over time. Whereas, for short term loans, the personal loan interest rate is high. With high-cost debt, it is the best alternative to pay off your personal loan as quickly as possible.
When you pay off your personal loan, you cannot use these extra funds for other things. This means you can enjoy fewer things in your monthly spending budget. You also end up paying an opportunity cost because you will have to arrange for additional funds to put towards other goals.
There are a few rare cases, in which you do not end up saving by paying off your loan early, because the costs are already added into your loan.
Save for the Future: You are in a stronger financial position once you have paid off your personal loan. The monthly repayment amount and the personal loan interest rate can be available as extra funds for other expenses, which you can hopefully redirect towards your other goals.
Better Ratios: You become a better borrower in the eyes of a lender. Lenders require the satisfaction that you have enough funds to repay your loan, and also that existing loans don’t consume much of your income. In order to do this, the lender calculates the percentage of your income that is dedicated to the personal loan repayments. This is called the debt to income ratio. When you pay off your personal loan early, you improve your debt to income ratio, which increases your chances in the future if you ever need approval for a new loan.
Better Credit: Your credit score improves when you pay your debt. A portion of your credit score depends on the amount you are borrowing presently, relative to the maximum amount you can borrow. If you have maxed out your spending amount, your credit score will be lower. Therefore, when you pay your down debt, you are likely to ease up your borrowing capacity.
When you eliminate debt, you feel at ease and your stress is reduced. Some people choose to pay off their debt as soon as they have a chance, even if it is not sensible financially. For someone who is tired of making the monthly payments and the personal loan interest rate payments, it is best to evaluate the benefits and costs of debt before making any decision.
The Bottom Line
It is important to know the disadvantages associated with paying off your personal loan early. Once you are informed about paying off your loans early, you may or may not be eager to move forward, depending on what best suits your current position.
Whether you decide to wipe off your entire debt or make a little extra payment every month on top of your monthly payments and the monthly personal loan interest rate, it is important to call your lender and inform them about what you are aiming at. After this, you are likely to be better informed about how to move further. You will gain clarity regarding the amount to send every month and also if the amount you are sending is being credited properly.