Many of us have loans which we have used to pay for all sorts of things. However, there are some people that will encourage others to overpay loans, but we might ask ourselves – is it really worth it?
- Usually saves money – most loans will be costing us a significant amount of money and if we overpay them so that we can repay then early then we will be saving money. This is not always the case though and so it is worth investigating to see whether it is worth you doing this. Some lenders will charge you for overpaying your loan. This could just be a small admin charge or it might be a significant amount of money. It is worth finding this out before you make any overpayment plans. Your lender will be able to give you this information and it can be quicker to ask them rather than trying to search through the terms of your loan to find out. If the charge is not very high then it is likely that you will save money if you overpay because you will repay the loan more quickly and therefore save money in interest. You will be wise to do some calculations though to see how much you will save and see whether it is worth it.
You may feel that overpaying will be difficult for you. That it will be too expensive, but even if you can just overpay a very small amount you will be charged less interest. With less interest to pay you can afford to overpay a bit more next month and so on, so your overpayments get higher and your interest charges get lower. Therefore, it can be well worth thinking of ways that you can overpay, even if it is just a small amount. It could be that you have some savings and you can pay in a lump sum, that will be great as you will take away a chunk of debt and your interest will go down and you will be able to afford to overpay a bit each month as if you make your normal monthly payment it will be more than you need to pay as the interest charged will be less.
- Improves credit record – if you pay your loans off quickly then this will look good on your credit record. It will show that not only are you responsible when it comes to money but you can be trusted to repay loans. Of course, there is no knowing for sure what lenders are looking for when they do a credit check and some might prefer customers who do not repay early so that they can get more money out of them, but most will surely be happy that you have a good record for repayment and will therefore be happy to lend to you.
- May reduce stress – some people do find being in debt stressful. Some just do not like the idea of owing money and others have concerns about making sure they have enough money to cover each repayment. It can be a worry at times knowing that you have to find that money each month. Also, with some bad credit loans or credit cards, you do not have to repay much each month and the loan could hang around for a long time. This can be difficult and so paying off more than required can help the debt to disappear more quickly and the worry to also disappear.
- Improves prospects for future borrowing – if you decide you want to take on a big loan in the future, such as a mortgage, then your past history of borrowing will be scrutinised. You will also find that you will need to demonstrate that you have the budget to cover the repayments. If you have eliminated other loans then you will have fewer financial commitments and therefore will be more likely to be accepted for the loan.
It is therefore worth weighing things up. If you can save money then repaying a loan early is a sensible option if it is something that you can afford to do. It may also have other advantages such as improving your credit record, reducing your stress and making it easier for you to borrow in the future. However, you may find that you are charged for repaying your loan early and you will need to calculate whether you think that it is worth it or not. You may feel the advantages outweigh the increased cost anyway but this will depend on your own feeling towards the loan and whether your credit record and future borrowing are important to you. It is good to give it some serious thought though as it could make a big difference to you and your finances.