What To Know When Considering An Early Loan Payoff

Written By Daniel Dewitt

Published on September 21, 2022

Are you considering an early loan payoff? It might seem like a great idea, but there are a few things you need to know first.

Paying off your loan early can save money on interest and give you the pleasure of knowing it is one less financial obligation. But keep in mind that your loan documents might include a prepayment penalty, and paying ahead of schedule can negatively affect your credit score.

Things To Know When Considering An Early Loan Payoff

While you might think that an early loan payoff is ideal for anyone who has a loan, that is not always true.

It might be more beneficial for you to not pay off the loan sooner than the terms require.

How Does Early Loan Payoff Affect Your Credit?

Paying off a loan early (especially, a personal loan) does not always help your credit score. It might even cause it to drop a few points.

In general, the longer the credit history, the better the score. 15% of your FICO score will depend on the length of your credit history, so making regular monthly payments over time might be more beneficial for your overall score.

An open account can also improve your credit mix (this accounts for 10% of the score).

sticky note with written text debt payoff clipped to cash with text overlay considering early loan payoff

Pros Of Early Loan Payoff

1. You Can Save Money On Interest

This is the biggest pro of paying off a loan early. The longer you’re paying for the item or the service, the more it is going to cost. Consequently, the faster you’re able to make the final payment, the less you are going to spend overall.

You will especially benefit from paying off the loan earlier when it is a high-interest debt.

2. You May Have A Better Chance Of Getting Approved For Another Loan

If you’re planning on applying for another loan, then you should consider paying off your previous accounts before filing a new form. The debt-to-income ratio is something that lenders pay attention to when considering loan approval.

3. You Can Eliminate One Of Your Financial Obligations

Setting aside a certain sum every month can be stressful. Whether you have the money in your budget or not, most imagine what could have been done with the money had it not been for the loan.

Sometimes, the only way to get rid of this psychological and financial burden is to pay off the loan. And the sooner you do it, the less time you will spend worrying about it.

Cons Of Early Loan Payoff

1. There Might Be A Prepayment Penalty Included

Make sure to carefully check your loan documents. In some cases, you would be required to pay a prepayment penalty, if you decide to take care of your loan in advance.

Before making the decision, do the math – there are times when the penalty can significantly reduce your savings on interest. In some cases, you might not be saving any money at all.

2. You Might Affect Your Credit Score In A Negative Way

Solid monthly payments are typically beneficial for your credit score as they contribute to positive payment history. In the long term, making regular payments might be better than depositing a huge amount at once.

3. You Might Find Better Ways To Spend Your Money

If you can’t comfortably afford to pay off your debt early and would be forced to take money from your emergency fund to do so, then it might not be worth it.

man counting payday loan cash

Payday Loans – What Are They?

Payday loans are short-term loans that are usually based on how much you earn. At Carolina Payday Loans, Inc. you can submit a quick online request form and receive up to $550 on the same day or the following business day if approved.

All you need to qualify:

Government-issued identification or your driver’s license
Your most recent pay stub
A blank check

What Are The Advantages Of A Payday Loan?

Typically, you would have to pay the loan back in 30 days or less. This means that you can avoid any prepayment penalty as well as weigh the pros and cons of paying off the loan early – giving the whole sum back on your next payday would relieve you of your financial obligation in no time at all.

Get Your Payday Loan Today!

To sum it up, there are several things that you need to consider when thinking about early loan payoff. Carolina Payday Loans, Inc. provides you the ease of requesting a payday loan and paying it off early. Using the quick and convenient process allows you to get money when you need it and return it once you receive your next paycheck, it’s as simple as that.

Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.