If you find yourself with extra savings or an increase in income each month, choosing to use it to pay off your debt is always a good idea.
By paying off loans early, you can not only save money, but you’ll also be in a lot better shape financially.
We’ve rounded up some of the many reasons why choosing to pay off loans and decrease your debt will be a huge benefit and weight lifted off your shoulders.
From saving money to becoming more financially stable, here’s a guide to everything you need to know about why it pays to pay off your personal loan debt.
You’ll Save Money by Paying Off Loans Early
If I pay off a personal loan early do I pay less interest? The answer is yes. You pay interest on personal loans each month. If you’re paying down your personal loan over fewer months, it’s almost like you will get money without paying it back.
By paying off your loan early, you will actually save money in more ways than just interest.
While not paying interest for the next ten years will of course save you money, reducing your debt has other money-saving benefits as well.
When you have less debt, you will also qualify for better interest rates on future purchases. Less interest means more money saved.
You’ll Be Stronger Financially
When you are able to pay off your personal loan early, this will put you in a much stronger financial position.
Having too much debt can show a creditor that you are strapped pretty thin. Your debt to income ratio, for example shows lenders how much debt you have in relation to what income you have coming in.
The lower your debt to income ratio, the better interest rate you will qualify for.
By paying off your debt, you will also have more money each month after it’s paid to save or invest.
Living with less debt also puts less strain on you financially from a month to month basis. Saving for emergencies is important. If you’re living paycheck to paycheck paying debts, you aren’t able to do this.
Your Credit Will Increase
Inherently, when you pay off a personal loan debt, your credit score will increase. The less debt you have, the more your credit score increases.
If you don’t exactly know how much debt you have and what your credit score is, you can download a free copy each year courtesy of the Federal Trade Commission.
Take a look at your score and see what personal loan debt you have. Any low hanging fruit or smaller debts you can pay off now, do so and you’ll see your score increase.
A higher credit score also means you will qualify for lower interest rates on future debts like mortgages.
Your credit score is also used for things like apartment applications, and by potential employers to see how trustworthy and responsible you are.
Free Up Funds for the Future
One of the most important pieces in terms of reducing your debt and paying off your personal loans early is you will free up more important funds for the future.
Saving money means more money for big purchases. Money saved can be used for a down payment, starting a business, education, travel, or even better, a rainy-day fund, and your retirement.
Saving money for the future may also include starting a business or investing more money in a business you currently own. Investing money in yourself and your business is a great way to literally put your money to work.
What to Do With Extra Money
If you have extra money you’re saving after your debt is paid off, pretend like you still don’t have that money and automatically add it to your savings each month.
You can literally set your checking account to transfer the extra money into your savings account each month.
Other ways to save money include investing it or using it towards retirement. If you have a 401k for example, and you weren’t using it or maxing it out, do so.
You might also consider other retirement investments, the stock market, charitable donations, or a real estate purchase.
How-to Payoff Loans Early
If you’re wondering how to pay off your loan early, there are a few tricks to keep in mind.
First, make paying off your debt a priority. From saving money elsewhere to cutting back expenses, any little bit helps.
Start by paying down your loan with the highest interest rate or the shortest term as well. If you have a high-interest personal loan or a payday loan, for example, always start there.
Lastly, even the smallest amount will make a difference. No additional amount is too small to pay. Whenever you are able, pay even a little bit extra each month and you’ll quickly see results.
If you’re serious about paying off a debt early, you can also speak to your lender and tell them this is your goal. In some cases, your lender may suggest splitting your payment into two each month.
Sometimes making just two payments a month instead of one but paying the same amount in total will actually save you money in interest.
Paying Off Personal Loan Early Means Peace of Mind
Paying off loans early has several benefits both financially and mentally. If you can pay off your loans early, you’ll also have a lot more room to breath each month.
Being financially stable, having more money saved, and extra funds to use for retirement, investing, or saving is the ultimate goal many of us share.
Feeling strapped for cash isn’t a good feeling. Living paycheck to paycheck or being unable to save is stressful.
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