All around the world, people are burdened with personal loans that they have taken out for a variety of reasons. Personal loans can be very flexible and helpful, but they also represent yet another payment that you have to make on a regular basis. We're going to help you understand the benefits of and things to know about paying off your personal loans early.
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The Top Line
- Personal loans are very flexible loans that banks can provide to you for a number of different purposes and needs.
- Those that have personal loans must service the debt on a monthly basis, paying back the principal borrowed plus interest.
- Personal loans can present a burden for those who don't have enough cash flow.
- Many people seek to repay personal loans early as a way of managing their finances better.
- There are both advantages and disadvantages to paying off personal loans early, but there are far more advantages.
Advantages of Repaying Personal Loans Early
Personal loans are helpful, but for many, they have served their purpose. It's good to get rid of debt. Here are some of the clear advantages of paying off personal loans early.
Paying off your loans early means that they will not have as much time to accrue interest. For small loans, this is not much of a concern. For large loans, however, this could save you thousands of dollars over the life of the loan.
Some people can afford to make the monthly payments with interest, but they don't like to owe someone else money. Indeed, having debt does hang a cloud over you. If you want to make things easier and reduce your stress, paying off your personal loans earlier is definitely an option.
Higher Borrowing Power
If you are planning on making a large purchase such as a home or vehicle with the assistance of financing, then it may be a good idea to pay off your personal loans early. Your lender will likely want to see that you don't have any large outstanding balances and that you can afford this new loan. This could help you to get a better interest rate and increased chances of approval.
Disadvantages of Repaying Personal Loans Early
Though paying off debt early is almost always a good thing, there are some ramifications that you should be aware of. Here are some of the potential downsides of paying off your personal loans before they come due.
Short-Term Credit Harm
Paying off a loan could close your account. Sometimes, this can hurt your credit score by a few points but usually does not have a heavy impact. Still, you should make sure that you don't need a specific credit score for an upcoming purchase before you close your account.
Reduced Funds Available
We've all been there--should we continue building up our cash emergency fund or pay off our debt? It all depends on your individual circumstances. If you choose to pay off your personal loan, you may have less cash available in the event that you need it. However, for some, this is worth it to get that debt off the books.
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