Posted on: 13 June 2016
Installment loans are somewhere between traditional loans and payday loans. While a traditional loan is usually long-term, such as over several years, and a payday loan involves a one-time repayment within a few weeks of the initial loan, an installment loan consists of several payments over several months. While the extended payments of an installment loan make it more affordable than a payday loan, many people feel stressed or anxious knowing that they have a current loan that they need to pay back. This may make you think that it is a good idea to pay back the full balance of your installment loan before it is due if you are able. However, there are a few reasons why that may not be a good idea.
Paying Back Your Loan Early Will Not Save You Money
With a traditional loan, the longer you have a loan balance, the more interest you are charged. In many cases, you can pay off the principle balance early and reduce the overall amount that you will pay in interest over the life of your loan. However, most installment loans do not work like traditional loans. Instead, when you agree to the loan, you agree to pay the full fee and interest associated with the loan. This will not change if you pay back the entire loan the first month your payment is due or if you wait and make each of your scheduled payments. Since paying back your loan early will not save you money, you have little incentive to do so.
Paying Back Your Loan Early May Stress Your Finances
While putting extra money towards the balance of your loan every month may take some mental stress off of you, it does not allow you to save up for emergencies. If an unexpected emergency arises, it is a better idea to have savings to cover the emergency rather than have to take out another loan or use your credit card to cover the emergency. For this reason, it is a better idea to pay your scheduled installment each month rather than stress your finances by paying off your installment loan early.
Investing Your Money Is a Better Idea
Since you will not save money by paying off your loan early, if you have excess cash, you might consider investing it instead. Keeping money in a savings account or a CD will earn you interest, which is a better way to use your money than paying off your loan early.Share