Paying Your Installment Loan Off Early: A Guide

Whether you face unanticipated expenses or need to make a large purchase, an installment loan is one option to meet your cash needs. An installment loan is a debt product with regular monthly payments that you repay over a specified time period. This period is known as the loan's term.

You can pay your installment loan before the term ends. However, depending on your financial situation, this may or may not be the best financial move. Keep reading for everything you should consider when deciding to pay your loan off early. 

A top advantage of paying your installment loan off before the term officially ends is that this will reduce the amount of interest that you pay over the life of the loan. For example, assume that you borrow $10,000 for a term of 36 months at an interest rate of 12 percent. Your normal monthly payment is $332.14.

The loan's anticipated interest is $1,957. However, if you can pay an extra $100 each month, you'll reduce your total interest expenses by $527. The higher your loan's interest rate, the more dramatic your savings.

Another benefit of paying an installment loan off ahead of schedule is that this puts more money back into your monthly budget. If you anticipate future cash flow problems or want to comfortably live on a smaller income, lowering your fixed expenses is smart. 

One of the disadvantages of paying your installment loan off early is that this puts a strain on your budget. To pay extra towards your loan, you'll either need to reduce your spending or increase your income. Either of these options requires time and energy; if you already deal with a busy schedule and a lot of obligations, trying to add more to your financial to-do list may not be sustainable.

Another thing to keep in mind is that when you make extra payments to your installment loan, you sacrifice the liquidity of your money. If you find yourself in need of cash, you can’t easily access the extra money that you've paid towards your installment loan. Should you need cash, you might have to take out another loan to get the funds that you need.

Depending on your credit history, your credit might benefit from keeping the loan for the entire term and making all of the payments on time. A portion of your credit score also looks at the type of debt that you have; a mix of debt (like an installment loan and a credit card) is better than having one type of debt.

If you have contemplated paying your loan off early, ask your creditor if there's a prepayment penalty. This will impact any interest savings that you achieve from paying your loan off early.

Ask your lender how they treat payments that exceed your normal monthly payment. Some lenders will automatically use the funds to pay down your loan's principal. However, other lenders will put the money towards your next loan payment.

While this decreases the next month's payment, you'll save more money in interest if your lender puts the extra money towards the loan's principal. See what you need to do to make sure that your additional payment goes towards the principal.

You should also look at your loan's interest rate when deciding if an early payoff is a wise financial decision. Should the loan have a low interest rate, you may be better off diverting your extra money to your retirement savings or investment accounts.

Need to take out an installment loan to meet your cash needs? Contact Ardmore Finance today.