There are a lot of people that feel they should be repaying their loans early. We do often hear that we could save a lot of money by doing this. However, it is advice that is suitable for some people more than others for a few reasons.
They Could be a Charge to Repay Early
It is really important to make sure that you check to see if there is a charge for repaying the loan early. This is often called an early redemption fee and it can be a part of certain loans. It will be in the terms and conditions of the loan, but it could be easier to just to ask the lender in order to find out. With some loans it can be extremely high. This tends to be mortgages with a fixed rate term and they will have a high charge if you try to repay before the term ends or they may even charge once that term is over but it might be less. Sometimes the charge might be quite small and it is worth paying it and then overpaying the loan in order to save money. However, it is worth calculating how much difference it will make first to ensure it is worth repaying it early. There will also be some loans which have no fee like this at all so there will be no calculations that need to be done with these.
You could Get a Better Return if your Saved the Money
IT is worth checking out the interest rates carefully. It is normally the case that loan interest will be significantly higher than anything you can make on your savings and therefore repaying a loan will be much more worthwhile than saving money. However, this will not always be the case. If you can find a savings account with a relatively high interest rate and a loan with a relatively small one then it could be better to save the money. For example, you may have a low mortgage rate, as mortgage interest tends to be fairly low and if you have a savings account whether you tie the money up, such as a bond or one that you need notice for withdrawals they could pay a relatively high amount which could be more than you are paying on the loan. You will need to do the calculations carefully though, to ensure that you will gain more by saving, rather than repaying the loan. Things may change too, especially if interest rates change so check regularly.
You Could Deprive Yourself Elsewhere
You need to be careful, that if you are making overpayments on a loan, that you are still keeping enough money to pay for everything else. You will have other financial commitments and you need to make sure that you keep up with those. For example, you need to pay your bills and other commitments and have enough left to pay for food and travel and things like this. Make sure you calculate carefully and budget appropriately so you keep to all of your financial commitments.
It Could be Stressful
For some people it could be stressful to overpay a loan. This may sound odd, but if you are trying to cut back spending elsewhere, they may find it difficult to cope. They may not be happy with having to give up their luxuries, budgeting all of the time or working harder to earn more money. So, it is wise to think about whether this could be an issue for you or perhaps for other people living in your household.