Loans cost a lot of money and interest is normally added on to the cost every month which means that they will get more and more expensive the longer you hold onto them. This means that if you pay back a loan early, you will save all of this interest and so you could save a significant amount of money. Therefore it would almost seem obvious that you should repay a loan early, but there are some exceptions to this.
Firstly, loans tend to have an early redemption fee. This means that you will be charged a sum of money to pay it back early. This can vary a lot depending on the type of loan and the provider and some will not have them at all. Make sure that you are aware of what this is for the loan that you are thinking of paying off early so that you can calculate whether the saving that you make in interest will be more than the cost of the fee for paying it off early.
Some people may worry that if they pay their loan off early, they will have no money left in savings to fall back on. Although this is an understandable viewpoint, it is worth remembering that the cost of a loan is high. If you use savings to pay for it, you could save a lot of money in the loan fees. The savings may have been earning some interest, but it is unlikely that they will be earning more than the cost of the loan. If you have nothing to fall back on, it may feel a bit scary, but once the loan is paid off you can always borrow more if you really need to, but chances are that you will not need to and that you will be much better off financially.
If you have a UK student loan, then it is unwise to pay it back early. At the moment the rules are that the loan only has to be paid back if you have a high enough income and if it is not all paid back by the time you are thirty it will be written off. It does not make sense to pay this back early as you never know what may happen in the future. If you lose your job, take time off to look after children or elderly relatives or are unwell yourself and not working, you may be able to miss repayments and so could end up paying back less than you otherwise would.
If you have an interest only mortgage with the money that you are accumulating to pay it back at the end of the term earning good interest then this may not be worth paying off early. Calculate the cost of the mortgage, including any insurances you have to have alongside it and then compare that with the return you are getting on the money you have invested. You may find that it is better to keep that money invested and growing in value compared with paying off the mortgage early. Obviously this may change over time, depending on interest rates and the stock market, so it is worth keeping a regular eye on what is going on.
These are a few exception though as in most cases it would be much better to repay the loan early than to wait for the full term if you can. Even small amounts that you can pay off will all add up and could lead to the cost of the loan being much less by the time you add up the costs at the end of the term. Ther is also the freedom of no longer being in debt which can really mean a lot to many people. You may think having a loan is fine, but there is nothing like the feeling of knowing that you have paid it off and that you no longer have to worry about it anymore. Monthly loan repayments can be a big drain on your finances and even if you have an overdraft or credit card, which do not need big repayments, having no debt can feel amazing. It can be such a good experience knowing that you are now managing only on money that you actually have rather than living on someone else’s money.
So although it is usually much better to pay a loan off early, both financially and for peace of mind, it is worth giving it some thought. Think about the money that you will save and compare it to what you may be making if that money is invested and look at the fees you may be charged for paying it off early. Also consider the type of loan and whether there are any benefits to holding on to it.