Many of us have loans and we often see evidence that repaying loans early might save us money. This can make us feel like we under lots of pressure to repay loans. However, there are some loans that are worth paying off early and some that may not be worth it. It is good to have an understanding of features that might affect whether you would want to repay a loan early or not so that you can decide whether it is worth trying to do so or not.
Student loans are very different to other loans and should be treated as so. They get written off after thirty years and so if you feel that you will not repay all of the loan before this time then you will actually be worse off if you repay it early. The loan repayments are determined by your earnings and if your earnings are low or no existent then you will not have to repay any of the loan. If you are a high earner and think you will be consistently through the term of the loan then it could be worth repaying early as you will then pay less interest.
Early Redemption Fees
Some loans have an early redemption fee. This means that you have to pay a fee if you want to repay the loan early. The amount can vary and sometimes it can be worth paying and sometimes it is not worth it. In order to work this out you will need to calculate how much the loan will cost you for the remaining term. To do this calculate how much interest you will pay. Then find out what the early redemption fee is and if this is less, then you will save the difference. If it is more, then it will probably be worth waiting and repaying the loan across the stated term.
It is also worth looking carefully at the interest rates (and any other fees) that you are paying on the loans. It might be better to leave your money elsewhere if it is earning more. It is rare for savings to pay out more than you are charged on loans, but it is possible. If you have your money tied up in a bond, invested or you are lucky enough to find a high interest savings account then you should be able to make more money than you are paying on some loans. It will very much depend on what accounts you can find to put your money in and how much interest you are paying on your loans. Loan interest differs a lot, so you will need to check what you are paying. Usually a long term loan will have interest that is a lot lower than a longer term loan.
Managing other bills
While it can be really good to repay extra off your loans, so that you are able to whittle down your debt, it is worth making sure that you can manage all of your other bills as well. If you pay too much off the loans, then it may not leave you with enough money to cover the costs of everything else. This could mean that you will end up having to borrow in order to afford these and this will defeat the object of repaying early. So do make sure that you are aware of how much money you need and that you make sure that you are leaving yourself enough money.
Going without things
In order to repay more off your loans it may mean that you will have to go without things. You may need to cut down on spending on luxury items and possibly even on some essentials as well. This will be easier for some people than others and you need to consider whether this is something that you will be happy to do. It can be easiest to set a budget and then buy things from that so that you know that you are not buying too much but you are also confident that you are not spending too much money. It can be a good way to treat yourself without spending more than you can afford.
So, it is important to make sure that you only repay your loans early if it is financially better for you to do so. This will depend on the type of loan and the interest rate. You may need to go without things in order to do this, but you need to not only make sure that you are happy with doing this, but that you can afford to cover all of your other bills as well. It is worth thinking about this and putting together a plan so that you know how to move forward.