Paying debts off early can feel really good. Knowing that you can get rid of the debt and no longer have to make those monthly repayments can mean that you are better off and free of the burden. However, it is not always best to pay your debts off early.
Some debts have what is called an early redemption fee. This is a charge made if you decide to pay off early. This can vary a lot between different types of borrowing and it can be very high. It is therefore worth checking to see whether the savings that you make from paying the loan off early are higher than the money that you have to pay out so that you can do this.
Some debts can be very low in interest. Things like a mortgage, although they may seem expensive, because the loan is spread over a long term, the rate can be lower than other types of lending. If you have a low rate, then it could be better to save or invest money rather than pay back the loan. Obviously you will still need to make the required payments or else you will be charged high fees, but you may not be wise to overpay and pay the loan off early. It could be better to invest the money you would have used to pay it off and you will get a higher return this way. This will all depend on how well your investment does though and so there will be an element of risk. You will have to decide whether you are prepared to take on this risk or not.
A student loan may also not be worth paying off early. In the UK, repayments are low and are taken out as part of a graduate’s tax rate. This means that it does not affect their ability to borrow as this is normally based on their gross salary (i.e. before tax is taken into account). It is also only charged once they earn over a certain amount and is written off after thirty years. Therefore at the moment, it is best to only pay what you have to as you may find that you will never have to pay back the full amount.
Some people worry that if they pay off their debt early, they may be short of money and need to borrow again. However, as a debt is so expensive (in most circumstances) it is best to pay it off if you can and if you do get short of money in the future then you can borrow. You may find that you do not need to borrow after all and will have saved all of that money, which will make a huge difference.
Most debts are very expensive and it is worth paying them back early. By paying them early you are likely to save a lot of money as interest is charged for the amount of time that the loan remains unpaid. There is also a burden associated with being in debt and not having any loans can make you feel really free. It will also mean that you will be able to start saving money, investing it or you will be more easily able to borrow money should you need to in the future. Although getting debt free may feel like the best way to be, if you want to buy a home, you may need to get a mortgage or you may need to borrow for another reason. If you already have already have a lot of debt, you may find that no one will want to lend to you. It will have an effect on your credit record and could mean that lenders see you as a big risk to lend to and therefore are reluctant to do so. So some debts can be worth having, they may be the only way that you can get something that you want and they may even be able to save you money in the long run. However, paying as little as possible for a debt makes a big difference and so if you can pay it back early and avoid a lot of interest repayments, you would massively benefit in the long term with regards to the state of your finances.