Updated: Oct 8, 2021
Applying for loans and paying off the balance isn’t something uncommon. Most people who own homes and cars undergo the same process of paying off their loans for the next couple of years. But what if one day you come across some extra money and you want to use it to pay off your personal loans early? What good will it do? You’re in luck! The following guide talks exactly about how paying off loans early can benefit you. Read on to find out just how much money you can save in the long run by repaying your debts early.
1. You Save Money on Interest
The faster you can pay off a loan, the less it will cost you in interest, and that’s a fact. Instead of paying off the interest for the next couple of months or years, being able to repay it all at an earlier time means you only pay interest up until the moment you pay off the balance. That could actually save you a considerable amount of money.
For example, suppose you took out a personal loan worth $30,000 with an interest rate of 10% and three years left on your term. You’ve already paid $10,000 of it. Now, if you pay off the remaining 20,000 in a lump sum, you’d be able to save more or less about $6,000 in interest versus paying $9,000 in interest over the full life of the loan.
2. Get More Money in Your Monthly Budget
When you finish repaying a loan early, you’ll be able to divert the money you’re supposed to use in paying your loan into other means. That could be a lot of money going into your monthly budget for other important needs like maintenance of your house, vehicle, or for additional supplies. You can also use it to further build your emergency fund, which can definitely be useful at times of intense need. If you don’t know what else to do with the money, maybe investing would be a great idea.
3. Lowering Your Debt-to-Income Ratio
Aside from your credit score, maintaining a healthy debt-to-income ratio is also important. This is basically the sum of your debts divided by your income, which is a key metric that a lot of lenders rely on when processing loan applications. If you ever plan on taking out a new loan again in the future, you’ll have a higher chance of getting approved immediately because of how good your debt-to-income ratio is. Another effect of lowering your debt-to-income ratio is a slight increase in your credit score, which lets you qualify for more favorable loan terms and options should you need it.
Final Thoughts - Being Debt Free is a Blessing
Being free from the burden of debt is something that not anyone can achieve in a short time. If you’re able to do it by paying off your loan before it reaches its full term, then you’ll be able to enjoy that peace of mind. Being free from debt responsibility opens you up to many things, and it eliminates some of the pressure you feel around your monthly finances. It’s a benefit that transcends financial freedom as it also frees your mind from the stress of paying off a loan. Now you’ll have a chance to put your money into good use by saving up or investing it.
Athens Finance is your trusted lending partner offering personal loans in Athens, AL. We offer a variety of personal loan sizes that fit your needs and your budget. If you ever find yourself in need of some money to finance any personal purchase or pay off your bills, our loan officers are more than willing to assist you. Contact us today to get started!