If you're almost done paying off your individual loan, it might be tempting to do everything you can to pay it off early. In the end, who doesn't wish to have one less monthly payment to bother with? However, surprisingly, paying down your individual loan debt before it•s due may not continually be the neatest financial move you may make.
With that in your mind, below are five things to bear in mind if you're considering repaying your individual loan early. Then decide if paying off your debt in advance is the right choice.
Monthly expenses
Before you are able to decide whether it makes sense to repay your individual loan, you have to consider other monthly expenses. Quite simply, it doesn't make sense to settle your individual loan if doing this gets in the way of keeping up with your bills. Your monthly expenses (any mortgages or housing payments, bills, and grocery bills) ought to always be your first priority.
The same applies to any other recurring debts, like a student loan or car payment. It's absolutely crucial you retain up with your monthly obligations for these things. Not simply will doing so help keep extra fees from accruing, however it will also ensure your credit report stays in good shape.
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Emergency savings account
Along with handling your monthly expenses, building an urgent situation savings account can also be something you should prioritize over paying down the loan early. As the name suggests, an urgent situation checking account is supposed to help you cover unexpected expenses like medical bills or car trouble.
Conventional wisdom states that you ought to aim to have three to six months• price of expenses in an emergency fund at all times. If you don't have that much in place yet, that's okay, but you must take time to build up your fund before tackling other financial targets.
Prepayment fees
As you may be able to guess from the name, prepayment fees are fees that you•ll be charged by the lender if you opt to pay off your loan early. While these fees are, admittedly, less frequent nowadays, they still exist. They're there to make sure that the lending company will still make money from the loan, even if you skip interest payments by repaying the borrowed funds early.
Your initial step should be to review the borrowed funds terms to make sure you don't possess a prepayment fee. If you do, take time to calculate just how much you'll save by paying off your personal loan early and compare that to the quantity of the fee. If your interest rate is comparatively low and the fee is high, it might be worthwhile to simply wait to repay the loan and to keep making your monthly obligations normally.
Retirement funds
No matter how old you are, saving for retirement is vital. Whenever possible, your ultimate goal should be to increase your retirement accounts, to not remove from their store. With that said, it's not the best idea to take money out of your retirement accounts to pay off financing early. In fact, doing so could have some costly tax consequences.
Depending on the kind of retirement account you have, there might be a penalty for withdrawing from your account early. The first withdrawal penalty is often 10%, which is charged along with paying regular income tax on anywhere that you•ve obtained from your bank account.
If you're considering going this route, you•ll wish to calculate how much you'll invest in penalties and compare that to just how much you'll save if you are paying the loan off early. It will probably be preferable to simply keep making the standard payments in your loan.
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Interest rate
Lastly, before paying off your individual loan early, you•ll want to compare its interest rate towards the ones you're paying on your other debts. Generally, another types of debt, like credit card debt, include higher interest rates, which means it makes more sense to pay down those first. By working to pay off your financial troubles using the highest rate of interest, you'll save more money on interest fees with time.
That said, if you have an unsecured loan along with a less-than-perfect credit score, there's a chance the rate of interest you•re charged in your personal bank loan might be relatively high. If so, it in all probability is sensible to use any extra income to pay for down your personal loan as quickly as possible.
Interest rates on personal loans are dropping right now, thanks to the Federal Reserve's rate cuts early in the year. So, it's actually a wonderful time to think about getting a personal loan if you're searching for additional cash. PayPasser will help you compare rates to find the best deals.
