3 Times Paying Your Debt Early Isn’t Smart

Written By Jeff Hindenach
Last updated February 12, 2020

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Person counting money to symbolize getting a loan
Money Saving Tips
September 8, 2016

Simple. Thrifty. Living.

It’s the age old question: Should you pay off loans early? Whether it’s a mortgage, a student loan or a car loan, paying off your debt early can give you great peace of mind. The problem is, it’s not always the best financial solution. It’s always good to look at the overall financial picture before you decide to pay off any debt. Here are three times that paying debt early isn’t the best option:

Paying off your mortgage is not worth compromising your other finances. If you have student loan or credit card debt that has a higher interest rate, it’s smarter to pay off that debt before you focus on extra payments to your loan. If you don’t have an emergency fund, then you need to be contributing to that as opposed to paying extra on your mortgage. If an emergency pops up, you may end up paying way more in interest on hospital bills or home repairs if you don’t have an emergency fund. Also, make sure you are contributing a good amount to your retirement each month, especially if your company offers a match program. Don’t sacrifice your retirement for paying off your loan a little early.

One thing that people don’t realize is that they can make more money with the extra cash instead of paying off a loan early. Although you avoid interest on your mortgage loan, if you can invest that money at a higher interest rate than the mortgage is charging, then you can actually make money while paying off your loan. Look into investment options and compare the interest rate on your mortgage to the interest rate you would earn. If you would earn more by investing, definitely go that route. Need some help with investing? Sites like E*TRADE and TD Ameritrade are known for the help they offer to novice investors, so that would be a good place to start.

Refinance: Another smart options would be to consolidate and refinance your loan to get a lower interest rate, so you are guaranteed to make money by investing. You can consolidate with any bank or online loan company, but if your credit score is low, you could also consider a debt relief company like Accredited Debt Relief or National Debt Relief.

Always ask about prepayment penalties before you decide to pay off a loan. Most mortgages, student loans or car loans can have prepayment penalties, which can end up being the exact amount you were supposed to pay if you didn’t pay early. While it’s almost always a bad idea to pay loans with prepayment penalties early, weigh the pros and cons of paying early and make sure that you won’t be wasting any money by doing so. Sometimes peace of mind from settling a debt is more important than money.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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