Is Paying Off Your Installment Loan A Smart Financial Move?

When it comes to making the decision to pay off your installment loan, you should make your decision based off financial facts rather than psychological factors. Individuals who are debt adverse may try to pay off any and all debt as quickly as possible, even when it does not make sense financially. Looking at your entire financial picture can help you decide if early payoff is the right move for you.

What Is the Loan's Interest Rate?

Your loan's interest rate is a deciding factor that greatly influences your early payoff decision.

 If your loan has a low interest rate, it can make sense to invest the money in your retirement fund or investment account where you can earn a return higher than your loan's interest rate. For example, if your loan has an interest rate of 3% and your retirement account averages 6% a year, investing extra funds in your retirement account gives you a higher return.

If your loan has a high interest rate, it may be best to focus on paying it down as quickly as possible. Many signature loans have high interest rates because they have no collateral. A loan with an interest rate of 20% requires you to pay an immense amount of interest. Paying it off quickly offers an immense amount of savings.

How Is Your Monthly Cash Flow?

If you find yourself tight on cash each month or need to make room in your budget for future expenditures, prematurely paying off your installment loan is a wise move. By paying off the loan, you are freeing up funds to help ensure you have enough cash for all of your expenses.

Individuals with adequate cash flow can keep the loan for as long as it is financially prudent.

Is Your Interest Tax Deductible?

Student loan interest, mortgage interest, and home equity loan interest may be tax deductible, depending on your tax situation. You must take into account the amount that an interest deduction saves you on your taxes when deciding if it is advantageous to pay the loan off early.

Tax savings can reduce your effective interest rate, making it a smart decision to divert extra funds to a goal with a higher return.

Does Your Loan Have a Prepayment Penalty?

Some installment loans have a prepayment penalty if the loan is paid in full before a specified date. Check your loan paperwork to see if your loan has a prepayment clause, and if so, the amount of the penalty. Consider this penalty when deciding if it makes financial sense to pay the loan off ahead of time.

There is not a single correct answer to the question "Should I pay my loan off early?" You must take time to evaluate your entire financial situation so that you understand what your loan is actually costing you. With patience and a few calculations, you can reach an informed decision concerning early payoff of your installment loan.

For more information about loans and payments, contact a company like Las Vegas Finance.