Paying Off a Loan Early
Some loans make a feature out of letting you pay them off earlier than you originally intended, before the agreed term is up. If you find you have money to spare, you may be tempted to clear one of your debts by taking advantage of this feature - but is it necessarily a good idea?
Settlement Fees
The first thing to make sure of is that you won't be charged a fee for the privilige of clearing your loan balance. If you pay off a loan early, the lender won't receive as much in interest and many will impose a charge to cover their loss. This charge, sometimes known as a redemption fee, should have been made clear before you took out the loan, so check your documentation to see if you'll need to pay.
Interest Rates
What's the rate on your loan? Many loans (even most) will have a lower interest rate than any credit cards you have. It only makes sense to clear your most expensive debt first, so think about clearing your credit card balance before repaying your loan.
Also, calculate how much you'll save in interest by repaying your loan. Especially if you'll have to pay a settlement fee, it might be more profitable to invest the money in a high interest savings account or other investment rather than repaying your loan.
Emergency Funds
Will paying off your loan leave you strapped for cash? It's always a good idea to have a little cash in reserve for unexpected expenses or emergencies. If you don't keep a reserve, and you're hit with such an expense, then you might have to borrow again to cover the costs. This could work out to be more expensive than your current loan.
Conclusion
Paying off debt is almost always a good idea, but it may be the case that clearing a loan may not be the most effective way of making use of some spare funds. By all means, clear your loan as soon as you can, but first make sure that the money couldn't be put to better use elsewhere in your finances.
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