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Paying Loans Off Early

Posted by Arnold on 08/27/13, 14:33

Any sort of loan, whether it be a student loan, car loan, home loan, etc., may come with a certain payoff period. You will make monthly payments to the loan amount (which may include interest) until the loan is paid off. But sometimes you may want to pay a loan off earlier than the original schedule. You may double up on your payments each month, or maybe even pay it off all at once. Paying loans off early may save you money in interest (which may be the number one reason why someone would choose to do so), but you must be aware of the fine print of the loan beforehand. Here are some pitfalls you may hopefully be able to avoid so you are able to pay your loan off early if you wanted to:

• Prepayment Penalties: Certain loans may stipulate that penalties can be imposed for paying a loan off early. Credit companies don't want to lose out on all the interest they could have earned off of your loan had you stuck to the initial payment schedule. These penalties will usually disappear after a period of time, but don't prepay if you are going to end up paying more in the long run.
• Due Date Pushed into the Future: Some loans may use your overpayments and apply them to future payments. This is a way for the loan to stay on the current payment track, allowing the loan company to still receive all the interest it expects. If you see that your due date keeps getting pushed back into the future, see if there are any options to apply your payments to the current principal amount today.
• Overpayment Applied to Interest: This is similar to the previous point. Check your loan statements to see if your overpayments are being applied to future interest. This is still a way for a loan company to get all of the interest it expects from your loan. Only once all of the interest is paid off will your overpayments go toward the loan principal.

The main thing to look for when signing up for a loan is to check how overpayments will be applied to your loan. Make sure the loan terms state that overpayments should go directly to principal, or that you are able to specify the option of having your extra payments go to principal on a per-payment basis. Especially for loans with low monthly payments, such as student loans, paying off a loan early may save you hundreds or even thousands of dollars in interest.

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