Is it better to try to pay your loan back early?

Discussion in Loans started by JulianWilliams • Jan 14, 2015.

  1. JulianWilliams

    JulianWilliamsMember

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    Is it better for your financial health to try to pay your loan back early or do you think it's better to keep the payments at a minimum and use whatever savings you have to make some investments? The main issue with paying the loan back early is that you lose more money if you end up not being able to repay the loan in full and your collateral gets repossessed by the bank.
     
  2. LitoLawless

    LitoLawlessActive Member

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    I would say so. I think getting loans out of the way as quickly as possible is a very important step towards financial freedom. I still have student loan payment to make and the day that I make my last payment will be one of the best days of my life.
     
  3. Denis Hard

    Denis HardWell-Known Member

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    I think focusing on the risk of losing a lot of money should you fail to repay the loan will make you not do your best to get the loan repaid because always before you is the possibility that you are repaying the loan for nothing.

    IMO, it's best to repay a loan fast and invest afterwards because investing can be risky too. You can lose all the money you put in and still you'd have to repay the loan [BUT] you won't have the money because you spent it. You can avoid that by repaying the loan then investing once you have some financial freedom to do whatever you please with the money you earn.
     
  4. JulianWilliams

    JulianWilliamsMember

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    Thanks for the response. You're probably right. On the plus side, you no longer have to pay interest on the money you pay back, and it's unlikely you'd manage to get a better return on your investment in some other area anyway, so you're basically both reducing your monthly costs and paying back the loan quicker and quicker.
     
  5. Mika

    MikaMember

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    I think it depends. Paying off the loan early will definitely help your finances since you won't be spending that money nor paying for the interest. There's also a lower risk of something going wrong and you not having the money to pay for it.

    However, on the flip side: that loan is helping to build your credit. With a better credit, you could get lower interest rates in the future or better credit cards. Your credit isn't affected by paying off more, it only cares about making on time payments. Paying off the loan early means less payment times that you can pay on.

    Personally, I would choose to keep the loan since I value my line of credit more. I don't have much worry about finances at the moment either. I wouldn't invest the money though. I would put it in a savings account in case something happened and I did need the money.
     
  6. Rosyrain

    RosyrainActive Member

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    I would say find middle ground. If you are trying to build credit, then making monthly payments is a very good thing for your credit score, even though it is annoying to pay on the loan each and every month. I would pay just a little more on the balance each month so that you get it paid off early, but not so early that you are not building a good credit score.
     
  7. S.O. Price

    S.O. PriceActive Member

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    Well, they say that paying off a loan early is like an investment in yourself. If you have a loan that is charging an interest rate of 5.25, where could you get a savings rate like that? Not too many places... So take any extra money and pay down the loan and *save* yourself that interest rate.
     
  8. Onionman

    OnionmanActive Member

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    The general rule of thumb would be to focus on the level of interest rates - if the debt's rate is bigger than anything you could get on deposit, then yes you should normally be paying it off. Obviously there will be case-by-case situations to consider - e.g. liquidity considerations. At let's face it, mortgages are loans and we don't always pay them down first either.
     
  9. Miaka_M

    Miaka_MActive Member

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    I think that it is definitely better to pay it back early. If you wait and wait, the interest will increase the amount to a larger number than what you had originally taken out. For example, my student loans are about $4,000. I paid them back as soon as I finish the year because I didn't want the interest to build and I like starting a clean slate during the next year. :)
     
  10. clairebeautiful

    clairebeautifulActive Member

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    Perhaps this has been said, but it all depends on the interest rate on the loan. If the interest rate on the loan is lower what you'd be making in interest by investing what you are keeping to yourself, then go ahead and pay the loan off in as much time as you want and invest what you might use to pay the loan off. Your money in investments is doing better than paying off the loan.

    If it is a high interest rate though - pay off as soon as possible. I mean, the idea is that whatever you paid for the items you bought with the loan are actually MORE EXPENSIVE than their list price because you are paying interest. Does that make sense?

    I try to stay debt free whenever possible. As a general rule of thumb, it is just easier and more advantageous for having more money later. But right now we have an interest free loan on our kitchen appliances for 2 years. We're paying them off in that time, because, as a free loan, the money in our bank is making us money over the time we keep it. We have 0.01 percent on our minivan, which, again, is so low, we are happy to have that as a payment rather than dish out 10 grand to get it off our backs.

    But we absolutely NEVER have credit card balances... the interest rate is ridiculous.
     
  11. Lushlala

    LushlalaWell-Known Member

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    I am not sure to be honest. When we were moving countries, we decided to settle our loan early by like 6 months so as to free up money in a bid to save faster. The balance was just under £7k. I thought we'd save a substantial amount, but in the end we saved about £200! I was quite surprised by that. But nonetheless, it was a huge weight off our shoulders as we could focus on saving more money.
     
  12. remnant

    remnantActive Member

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    One should assess their financial health correctly before deciding to pay a loan early. It would be good if the investment in question is high yield. A loanee needs to negotiate an agreement with the lender for a revision of the loan agreement to repay in higher sums. Financial institutions would give a high credit rating for this.
     
  13. djdontpay

    djdontpayActive Member

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    Loans are designed to charge you more than what the banks pay savers or the markets pay investors. This means that you'll always stay one step behind if you keep a loan on your balance sheet for long. Also, its not black and white- you can save for a year and make a part pre-payment. Or you can pay a little extra each month. That way, you'll repay faster, but not feel the pressure that usually follows repaying a loan in one go.
     
  14. Corzhens

    CorzhensWell-Known Member

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    Advantage or disadvantage on paying back your loan would depend on the economic situation. If the inflation is on a continuing trend, it would be an advantage if you pay the loan for a longer period since the cost of money is getting lower and lower. It's just like a dollar now will have a value of only 60 cents 10 years from now and probably your salary of $1,000 per month now will be more than double in 10 years' time. But if the economy is stable, it would be best to pay back earlier so you will not be saddled with the interest payments.
     
  15. Ke Gordon

    Ke GordonWell-Known Member

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    I think in general it is better to pay back loans sooner rather than later as you have the finance charges that are spread out over time, and of course you are paying the interest on the payments. I think for most long term loans, mortgages, car payments etc. it pays to pay them off as soon as possible, and before the end of the loan.
     
  16. abonnen

    abonnenActive Member

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    I think it would depend on the loan, I know I think it would be great to pay off a loan early but you also have to see if there is any penalty from the lending company for paying off a loan early.
     
  17. Vinaya

    VinayaActive Member

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    If you cannot avoid getting loan, you should at least try to pay back as soon as possible. If you do not pay soon, interest will accumulate and you will have extra financial burden. If you cannot pay the entire sum at once, try paying with easy monthly installments.
     
  18. 17emilyhalko

    17emilyhalkoMember

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    I think that it depends on the terms of the loan, but if interest is involved in the loan, then paying off your debt is always what's best! The more time you wait to pay off a loan, the more interest will accumulate. Therefore, paying off your debt sooner would save you money! If there's not the problem of interest, then paying off your loan slowly is no problem, but there is almost always interest involved.
     
  19. GreenPersimmon

    GreenPersimmonMember

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    Personally, I would look into your loan agreement to see if you'll get punished for paying it back early. Sometimes, the contracts can be sneaky because they want the full interest. But if the loan is okay with you paying it off, go for it. Just make sure you do it in two checks, one to pay off the monthly loan with interest and the second one paid towards your principle. Makes sure the person you're paying understands that the extra goes to the principle and not the interest. Most loan officers will pay the extra towards the interest because it's more money in their pocket.
     
  20. atlmom5

    atlmom5Active Member

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    I'm of the mindset to pay off any loans as fast as I can. I worry about that interest compounding and wrecking havoc on my income and goals.