Don’t get your eyes checked, you read the title correctly. Believe it or not, it could be in your best interest to NOT pay off your loan early. I know what you’re thinking … you could save a load of money on interest if you pay off your loan early. You might be right. But that doesn’t mean that I’m wrong. If you don’t believe me, let me lay it out for you. Here are three reasons you shouldn’t pay off your loan early…
You waited too long to consider it: So maybe paying off your loan early would have been a good idea … if you’d done it years ago. Some loans (like your mortgage, probably) have you pay the largest chunk of the interest in the early years of the loan. So if you’ve waited too long, while you may pay off the loan a little early, you’re not going to see any real financial benefits of paying extra each month.
You might have prepayment penalties: If your loan is subject to prepayment penalties, you’ll be charged a fee if you pay off your loan early. Not all loans come with prepayment penalties and even if yours does, the penalties vary depending on the loan and the lender. Make sure you check out the fine print when signing your loan documents if your plan is pay off your loan early.
Your wallet might feel squeezed: Paying extra on your loan might seem like a good idea, but it also may tighten up your budget. Make sure you’re not “robbing Peter to pay Paul” as they say. Don’t let the future benefits of paying off a loan early outweigh the issues you may be giving yourself in the present. Paying extra on your loan might cause you to have to take from your emergency savings or lower your checking balance in order to throw extra money on your monthly payment.
While it’s fine to throw in a little extra on some loan payments, just make sure you’re informed and know what you’re doing before you commit to this repayment strategy.