Personal loans are popular among consumers because they are extremely flexible, allowing you to borrow money for just about any purpose. You can cover home improvements, car repairs, emergency medical bills, and much more. Some personal loans lenders will also allow you to pay off your personal loan early.
While it’s generally a good idea to pay off debt as quickly as possible, there are some circumstances where paying off personal loans early might not be the best action to take.
When paying off personal loans early might not be the best option.
1. You have a low interest rate.
If you have a low interest rate on your personal loan, you might not want to pay off your personal loan right away. If you have your money in a brokerage account earning a high yearly return or earning money from a money market account, you might not want to take money out to pay off your personal loan if the interest on the loan is lower than what you are earning.
2. You have limited savings.
If you don’t have an emergency fund or savings account, or it’s very low, you might not want to rush to pay off your personal loan if you have a low interest rate and an affordable monthly payment. Instead, you can divert extra funds to building an emergency fund for unexpected expenses.
3. You have other more expensive debt.
Paying off personal loans early makes sense if it’s your only debt or if it’s your highest interest debt. However, if you have other high-interest debt, like credit cards, you might want to consider tackling that debt first to save more money on interest and boost your credit score.
Summary
Personal loans are flexible and a useful financial tool when you need emergency funds. It’s generally best practice to tackle debt quickly to avoid paying more on interest and negatively impacting your credit score. Typically, paying off personal loans early is a good idea. You will spend less overall on the loan, prevent it from increasing your credit utilization, and have less debt to manage.
However, there are some specific instances when paying off personal loans early might not be the best option like if you have your money in account where you are earning money, don’t have an emergency fund or limited savings, or you have more expensive debt to tackle first. Consider all of your finances before paying off your loan early to make the best decision for you.
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