What Happens When You Pay Off A Loan Early
There is no feeling more liberating than finally being debt-free. Having a debt in the form of a loan can especially be very expensive while causing financial stress. Striving to pay off your loan early on can improve your financial position and current standing. However, it is no easy process and can take you a long time. There are several strategies that you can employ to go about the same. Some of the common ways include making multiple payments during each billing cycle, making a payment larger than the listed amount, paying of the loan in a lump sum and much more.
Making an early payment of your loan can seem like a viable decision, however, you must note that there are several implications of the same. Before finally deciding on the move, you must make several considerations. Here is what happens when you pay off your loan earlier than the scheduled term.
Pre-payment penalty – There are several types of loans that are issued with the condition of pre-payment penalty. This essentially means that you are charged a penalty fee for closing your loan earlier than the scheduled time. You can contact the lender to understand if this fee will be levied in case of early payment. Understand the same clearly and calculate if the amount is higher than the savings from the accrued interest.
Effect on Credit Rating – Pre-payment of an on-going loan like a personal loan does not have an immediate effect on your credit score but in the long run it can positively impact your credit rating. On the other hand, part payment of a loan has no effect on your credit rating neither in a long or short run.
Tax benefits – There are some loans that are offered with tax benefits. They typically include loans such as mortgages, personal loans, etc. Paying off such a loan early will lead you to losing out on this benefit. It is advisable to speak with a tax professional to evaluate the effects this would have on taxation. Sometimes, the tax-money saved can be much higher than the savings you make by getting rid of paying interest.
An early pay off of your loan can be very beneficial in several ways, however, it also brings with it draw backs. You give a big amount of money that you hold on to that you can invest in a more beneficial way or use as an emergency fund. There is no access to the money in the future, no matter how baldy you require it.