Paying Installment Loans Early Or On Schedule


If you've taken out a loan, the infusion of cash into your life can be very welcome. But that also means that now you've got these monthly payments to make. Even if the payments are easy for you to afford, seeing the extra cash flow out of your account every month can be tiresome, leading you to try to pay the loan off early. However, sometimes paying the loan back early isn't the best thing to do. Here's a look at how paying the loan back early or paying it as scheduled can affect you, and which strategy might be better for you.

Paying as Scheduled

Paying the loan installments as scheduled may have a greater effect on your credit score if the installment loan shows up on your credit report. Paying the loan on time, of course, is most important. But the longer you have to pay the loan back, the more on-time payments will show up on your credit report, and that means you'll have a longer record of payment to raise your score. You can certainly see good effects on your score by paying the loan early in a few large installments, but more installments prolong the effect. If you're hoping to get a good boost for your credit score from the loan, you may want to make payments as scheduled rather than early.

Paying the installment loan as scheduled instead of early also means you'll be able to retain more money in your bank account from the start of the repayment schedule. If you're paying as scheduled, obviously you'd be paying a smaller amount of money each month than you would be if you were trying to pay the loan off early. You can use the money left in your account for emergency savings immediately. If you were to make bigger payments to pay off the loan early, then that extra money would be unavailable to you should an emergency occur. If the loan is large and making larger payments wouldn't pay off the loan in a very short time (a few months, for example) -- especially if you don't have much of an emergency fund to begin with -- you may be better off paying as scheduled, at least until you can get a decent emergency fund built up.

Paying the Loan off Early

On the flip side of that, though, is the fact that if you pay off the loan early, you free up even more cash in your budget at an earlier date. For loans that are small or that you could pay off in a very short time with larger payments, paying early would be best, especially if you already have an emergency fund. Paying the loan off early means you have one less payment taking money out of your account.

Plus, if you pay the loan off early, you will end up paying less in interest in most cases. Your interest rate likely won't change, but fewer payments means fewer opportunities for the lender to gather interest. Note that this depends on the type of installment agreement you set up; some agreements have a set number of payments with a final amount that does not change if you make any payments early. But if you can reduce the amount of interest you pay by paying early, and you would prefer not to pay a lot of interest, paying the loan off early would be best.

Psychological Factors

There is a definite psychological benefit to paying off debt early. You don't have to worry about payments anymore, you have less debt (even so-called good debt like a mortgage can be a drag for many people), and you have a sense of accomplishment at paying something off. If the psychological weight of having debt is an issue for you, paying your installment loans off early may be better.

If you'd like to see how paying a loan off early or on schedule might affect you in terms of actual numbers, talk to your lender. You'll be able to get figures for how much interest you'd pay in each case and how large the payments would have to be to pay the loan off early in a certain amount of time.  


15 February 2016

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I really wanted to buy a golf cart to use to get back and forth from the bus stop and my sister's house. What I didn't realize when I first started looking at golf cars is how expensive they can be. That was when I began looking into financing options. I had to decide whether to use the financing services through the golf cart sales place, or to go around them and find a loan on my own. I took my time to learn the pros and cons of each type of loan that I was considering. Scroll through my site to find the pros and cons of different types of loans.