There are many people that repay loans early and we may be advised to do so as well. While there are advantages because you could save a significant amount of money, there are also things that you should be aware of. It is wise to know what these are before you decide whether to repay them or not.
Will You Be Charged?
The first thing to check is whether you will be charged for repaying the loan early. Some lenders will charge you to do this, especially if you are tied in to a fixed rate. The charge could be quite small, just an administration fee perhaps, but it could be significantly large. It is wise to find out what it is before you consider repaying the loan early. You will also find that some have no charge at all. Once you know the charge amount, you will be able to calculate whether you feel that it is worth repaying the loan early or if it is better to leave it. In order to calculate this you will also need to work out how much interest you are being charged and then you can calculate how much you will save in interest if you repay early and compare that to the amount you will pay for the charge.
Will it save you Money?
It is well worth making sure that you will save money by repaying the loan early. Even if it is a bad credit loan with no credit check. It might seem really silly and you might that there is no way that you will not save money unless you have a big charge as described above. However, if you have a student loan, then repaying it early could actually be to your detriment. This is because, after thirty years of holding the loan, it will be written off and you will not have to repay any more money. This means that if you make extra payments then this may have been money that you could of kept and spent on other things. The student loan is very different because students only have to repay what they can afford as the repayments are means tested. If you are a high earner and think you will repay it all then it can be prudent to repay it early and save interest but a majority of graduates will not repay their loan in full and therefore it will not be worth repaying it early. With all other loan types it is usually cheaper to repay early apart from those with big early redemption fees, as mentioned above.
Can You Afford it?
It is good to think about where the money is coming from to pay this form. Make sure that it is money that you can afford to spend on these repayments and that you will not need it for anything else. Usually once you make the overpayments you will not be able to get the money back out, although some mortgage has a savings account that the money goes in and it offsets the interest charged on the loan. But this will vary between lenders.
Which Should I Choose First?
If you do decide to repay your loans early, then you will need to pick between the different loans that you have to decide which you want to repay first. If you want to save the most money, then it is best to repay the most expensive loan first – i.e. the one which charges the highest interest. However, you may feel more motivated if you repay one which is smaller so that you can actually get rid of one and pay it off. Or there may be certain loans that you do not like and so want to get paid off. Think about what you think will work best for you.