Is Paying off Debt Early always a Good Decision?

Paying off debt is not as easy as borrowing money because it includes interest on top of the principal. Whether you have to pay off the debt in a lump sum or in instalments, early repayment can ease up the burden.

When you have got surplus income, paying off debt early is a good choice. It will not only help you save some money but also give psychological relief. However, not always paying off debt early is a good choice. It depends on your financial goals and the policy of the lender.

To decide between both the options, you need to compare the benefits you gain by paying off debt to the cost of keeping it. If you pay back early, you will save money, but there are some circumstances when you may need to choose the other alternative. 1

It allows for more cash flow.

One of the most significant reasons for paying off debt early is it helps you save money on interest payments. If you have got extra cash, you should pay more than is due. It will also ease the debt burden. There is no point of retaining the debt even if you have the capacity to repay the loan.

Of course, your car will not stop depreciating, for instance, and you cannot get back your interest paid at the time of selling the car. So, you should settle your dues even before the due date if you can. The money you save through early repayment can be invested or used for other purposes.

Note: Sometimes paying back the loan early can take a toll on your finances. Instead of saving money or allowing for more cash flows, it will eat up your budget. Early repayment is not an ideal situation if your lender has the policy to charge early repayment fees.

There are a few direct lenders who charge such fees to cover the loss or the opportunity cost of being paid on time. If you are planning to pay off your debt early, make sure that the loan agreement does not have a clause of early repayment penalty. If it exists, you should make payments on the due date.

It improves the financial condition.

After settling your dues early, you can have more money than you can utilise for other purposes. You will become a trustworthy borrower as it will prove that you stay committed to your financial obligation. Further, the money you save on interest payments can help you meet a financial emergency.

For instance, if you lose a job, you will be able to manage with benefits and savings you have. In case you still face some monetary problems, the lender can easily sign off on loans on benefits. Since the lender trusts your financial commitment, you can get a loan at competitive interest rates. Early repayment also leads to improvement in your credit score and debt-to-income ratio. A lender is more likely to approve the loan despite a bad credit rating if the debt-to-income ratio is low.

More peace of mind

Debt brings financial burden, anxiety and stress. No matter how good your credit history is, it will eat up a large chunk of your finances, leaving you with a meagre income source. It is always distracting you from your financial goals.

If you pay back debt early, you will get financial freedom. You will be able to spend money as you like. You will no longer have to worry about your monthly repayments.

Though there are some benefits of making early repayments, you still need to consider whether it is an ideal situation for you. Even though your lender does not impose any early repayment fees, it can take a toll on your financial condition.

1- It can limit available cash, and you can face difficulty making your ends meet.

2- You will likely repent your decision in case a financial emergency catches you on the wrong foot.

Early repayment is not a bad idea, but you need to evaluate its impact on your financial condition. As long as it is a short-term loan, you can avail the benefits of early repayment, but long-term loans for bad credit people in the UK require monthly instalments and easily manageable, so you do not need to do it.

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