Paying off a debt early can’t always save you money. Taking the initiative to pay down debt before it becomes a problem has both pros and cons.
Pro: You’ll save thousands in interest
Interest must be paid on loans. Additionally, you must pay interest on credit card balances. If you owe money for a long time, you will have to pay more interest.
Whatever the debt, the sooner you pay it off, the more money you’ll save in interest payments, and depending on the balance, this could be hundreds or even thousands of dollars.
Con: It is possible that you have already paid off most of the loan interest
You’ll typically find an amortization schedule on your loan that shows how much interest you’ll be paying and how much principal you’ll be paying. You pay most of the interest – especially on mortgages – in the early years, and then mostly principal later on.
When you are near the end of your loan term, paying off the loan early is not a significant financial advantage. Using your cash for something else would be preferable to borrowing money at this point, where you’re essentially borrowing money interest-free.
Pro: You save money that can be used elsewhere
If you make payments each month, you might not have much cash left over for other things. Having debt limits your financial flexibility. You’ll gain significant cash by paying off those debts early.
Con: The risk of depleting your emergency fund is high
Make sure that any cash you use doesn’t come from your emergency fund. Having no money left to cover a medical emergency or job loss can be catastrophic. To avoid defaulting on debt, keep at least three months’ worth of living expenses in cash. Don’t use it to pay off debts.
Pro: It’s good for your sleep
The burden of carrying debt from month to month can be physically and mentally exhausting for many people. You feel it.
Debt is something everyone has to deal with on a personal level and if you are unable to deal with even a small debt burden, pay it off in full.
Con: There is a risk of your credit rating deteriorating
Your credit may actually suffer if you pay off your debt early. You may lose enough credit history to get a favorable credit rating if you always pay your debts in full before they are due. Maintaining good credit requires regular, consistent payments on debts and paying bills on time as long as your debt level is not too high.
Ten ways to cut your debts down to size:
You can get out of debt by changing a few habits. Here are ten ways you can reduce your debt:
1. Keep track of your expenses by developing a budget
By preparing a budget, you can keep track of how much you earn and spend, as well as what you spend it on. You can eliminate unnecessary costs by understanding your income and expenses.
2. Avoid taking on more debt
Pay down your existing debt before adding any new debt. Whenever possible, avoid unnecessary purchases. It is more difficult to manage your debt when you add more debt by making unnecessarily large purchases while still owing money.
3. Stay on top of your bills by paying them on time and in full
When you pay your bills on time and in full, you’ll avoid high interest rates and late fees. Whenever possible, pay more than the minimum due to avoid paying more interest and fees.
4. Be sure to check your bills
Your bills and statements should be accurate and your rates should remain the same. Contact your lender if your rates have increased without explanation or if there are errors.
5. Get rid of high-interest debt first
It is best to pay off the bills with the highest interest rates and fees first in order to reduce your debt.
6. Don’t have too many credit cards
You might find it easier to manage your debt if you only have a few credit cards. Ensure they have the lowest rate.
7. Consolidating your debts can help you save money
You can manage your debts more easily by consolidating your debts with a bank or credit union because you make one payment to the bank or credit union rather than several to your current lenders. Before consolidating your loans, shop around for the best interest rate offered by the bank or credit union.
8. Make arrangements for repayment with your creditors
If you owe money to a company, contact them directly. You might be able to get a more affordable monthly payment schedule from them by setting up a repayment schedule that matches your budget.
9. Consult a credit counselor
An experienced credit counselor can help you develop a debt repayment plan. Avoid debt counselors who claim they can pay off all of your debt quickly for one low fee.
10. Do not let your guard down
You should be careful not to incur debt in the future once you have reduced or paid off your balances. It might be a good idea to phase out credit cards in favor of debit cards or cash.
I hope this post helped. If it did, feel free to subscribe for more useful advice. Need more inspiration? Try How to set short term financial goals (for 2023). Or if you need a deeper dive, try Financial Goals: How to set up a budget plan and goal planner.