Everyone is always saying that paying off debt fast is the best thing you can do for yourself. Heck, even I say that, but there are times that’s not the case. For example, there are times that paying off a loan quickly isn’t a good idea. Let’s look at those now.
Paying Off Debt Fast – It’s Not Always a Good Idea
It sounds pretty obvious that paying off debt fast is a good idea, but there are some factors that can make paying off a loan early a bad idea. These include the following.
1. Your loan’s interest rate – A loan with a really high-interest rate should be paid off as quickly as possible, but if you have a low-interest rate then you need to dig a little deeper before you decide to pay it off quickly.
Before paying off the loan, determine the amount of interest you will save if you pay the loan off early. Once you know that amount then you need to compare it to how much interest you could make by placing the money you are going to use to pay off the loan in a high-yield CD or savings account instead.
If you come out ahead by putting your extra money in an investment, then you should consider investing it instead. If not, then paying off your debt fast is the better option.
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2. Early payoff penalties – Some loans come with early payoff penalties. This means if you pay your loan off before the due date, you will be charged additional money. You’ll have to look at your loan documentation to determine if these penalties exist.
Look for early repayment fees. If there aren’t any, then you might want to go ahead and pay off your loan early. If they are there, then you need to calculate if the extra fees are more than the money you would save in interest by paying off your loan ahead of time.
3. Your taxes – Depending on the type of loan you have, you may be deducting the interest you are paying on your income taxes. This is true for a home loan. If this is the case, you’ll once again want to check to see if the interest you are saving is more than the deduction you are receiving.
If the deduction is less than the interest savings, then you’ll want to pay your loan off early. Otherwise, it might make sense not to.
4. Your emergency fund – If you have extra money, it may seem like the right thing to do to go ahead and get your debt paid off, but what happens if you have an emergency? Without an emergency fund, you’ll have to go right back into debt.
So, before you start to pay off any debt, be sure to have an emergency fund that covers at least three months of expenses with six months being better.
In general, paying off debt fast is a good idea and one I am always promoting, but there are times you need to slow it down and make sure it makes sense in the overall picture. If you keep these four considerations in mind before you pay off a loan, then you’ll have no problem making the right choice.
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