Many of us have loans and we might often hear about people that repay their loans early and wonder whether we should be doing the same thing. There are good reasons for doing this but it may not always be in your advantage to do so. Therefore, it is worth understanding more about the pros and cons so that you can decide whether it would be the right decision or you or not.
How much are the loans costing?
It is a good idea to start by working out how much your loans are costing you. Some loans can be very costly but there are others that could be free or cost very little. Until you are aware of their cost, you will not be able to make an informed decision. It is important to make sure that you calculate the cost correctly. This may not be as easy as it seems. You might just look at the interest rate but this will not tell you the full story. You may have additional charges or fees that you pay as well. You will also need to think about how much you owe as the interest you pay will be determined by how much you owe. Therefore, looking at the amount that you pay in interest each month is the best way to determine the cost of the loan. If you calculate how much that is in a year as well you will be able to see how quickly it can add up and what you would gain from repaying it.
How much can I get saving the money?
It is also worth thinking about what a difference it will make if you use the money for other things rather than paying off the interest. Perhaps imagine that you were putting it in a savings account instead and think about what interest you might get on it. In most cases you will find that you will be better off if you put the money into paying off the loan. You will find that most savings accounts pay a very small amount of interest and therefore you will not get much return on that money in such an account. However, if you look at the interest charged on a loan, you would save that much interest if you paid the money off the loan rather than put it into a savings account. You will therefore be financially better off if you put it against the loan. This will normally be the case but it is worth checking as you may have a low interest or interest free loan and then you might find it is financially better to put the money in a savings account.
How will I feel having them paid off?
The cost of the loan is not the only factor to consider. It is also worth thinking about how you will feel when you have paid off the loan. Some people feel that they are happier when their loans are repaid, then they do not have to think about finding the money for the repayments. However, there are also other people that feel like they are perfectly relaxed when they owe money and so this will not be relevant to them. It will be a very personal thing and will depend on whether you tend to worry about this sort of thing or whether you are relaxed about it.
Some people also like having a loan arranged. They feel that it gives them access to extra money that otherwise they would not have. This particularly applies to things such as overdrafts and credit cards. You can pay them off, but still keeping them so that you have access to money if you need it can be handy. This could also apply to something such as a flexible mortgage or loan where you might decide to pay off almost all of it but to keep it in case you need to borrow money and you will be able to do so using this.
So, you can see that it is not always a straightforward decision. Although it is normally beneficial to repay a loan early, there are some circumstances where it might be beneficial not to. Therefore, you need to have a think about your situation and whether you think that it will be a beneficial one for you. You also have to find the money to make those extra repayments and that might not be something that you will be able to do easily. It can be a personal decision and even if it is financially better to repay it early, there might be other reasons why it might not be the best decision. Make sure that you think it through carefully and discuss it with other members of your household as well as It could have an impact on them as well.