When you know you already have enough money each month for all your personal expenses, you may wonder if it’s fine to pay your personal loan ahead of time. And when you do, it can save you interest, leaving you extra money to spend on other things.
But would it be really okay to pay off your debt early?
Of course, making sure that you pay off your debts as soon as you can is beneficial to your overall finances and even your credit. But that doesn’t mean you won’t experience consequences. Because when you look back, personal loans have prepayment penalties. So when you pay ahead of your scheduled payments, it will not ruin your credit but it can tick your credit back if you plan on building a credit history. So to help you understand your situation better, allow us to give you an understanding of the matter at hand. Here are five questions you need to ask yourself before deciding to pay off your personal loan early.
Do You Need the Best Credit Score?
There will be no damage to your credit score if you pay off your personal loan early. However, in situations where you are applying for a mortgage, you need to have your very best credit score in order to give you a greater chance of approval. With this in mind, you may want to consider not getting excited about paying off your loan early just until after your mortgage has been approved.
Should You Just Pay Your Credit Card Debt First?
As you know, credit card debts have higher interest rates as compared to personal loans. So prioritizing your credit card debt will raise your credit score. So for some people, they opt to transfer personal loans to credit cards because of this matter. But just like in any other situation, it’s always important to take a step back and weigh your options before deciding which of the two would you be paying first, your personal loan or your credit card.
Do You Want to Reduce Your Debt-to-Income Ratio?
If your debt-to-income (DTI) ratio is critical for qualifying your loan, then you need to prioritize paying off your personal loan first. Even if your DTI will not likely affect your credit, mortgage lenders (especially if you are applying for a mortgage) will take it to heart as DTI is a key factor in the evaluation of your loan application. So, the lower your DTI, the higher the chances you get for approval.
Will I Put Myself at Risk?
It may save you more money on loan interest if you decide to pay off your debt using your savings. However, your actions can minimize your ability to cope when you encounter financial emergencies along the way. It will not affect you if your savings amount is abundant to uphold for the next six months but if your savings are slim, you may want to keep that money in order to not risk your finances and your ability to have a good credit history just because you want to pay off your loan early.
Would You Get Benefits When Repaying Your Personal Loan?
Yes, paying off your loan early would save you a lump sum of money. You’re probably also thinking that refinancing your home and consolidating your mortgage payments with that of your loan. That is why you are considering payment ahead of schedule. Whatever your reasons are, you need to have a clear understanding of the benefits so you can decide whether or not you want to pay off your loan as soon as you can.
Paying your personal loans quickly can help boost your credit in lots of ways. But it all boils down to your decision and unique circumstances as to why you want to pay ahead in the first place.
Hometown Finance Company can help you understand how your personal loans can help your credit score and credit history. We can provide you withsmall personal loans or installment loans in Murfreesboro. Contact us today to get started!