Nobody wants to have debt. Debt is money one owes to another person or entity and is expected to be paid on an agreed date. However, when debt piles up, it can be hard to pay. This is why as much as possible, some people wish to pay off debts early as soon as they can.
Good and Bad Debts
CNBC mentions that debt is usually divided into two categories: good debt and bad debt. Good debt is used to categorize the type of debt that can help an individual increase and build wealth. Good debt includes home loans, student loans, and business loans.
On the other hand, bad debts include those owed by individuals through credit cards; these debts are the product of excessive consumption and purchase that do not help the improvement of an individual’s financial status.
But good debt and bad debt is not always black and white, according to CNBC. There are a lot more factors that come into play when it comes to debts.
For example, in the case of student loans, sometimes, the loan for paying the tuition fee may be higher than what a student will earn after graduation. As a rule, a person who needs to take a student loan must ensure that what you will borrow will not exceed the total amount you will earn within the first year of being employed.
Mortgages, on the other hand, are usually considered investments and the safest form of debt. The Consumer Financial Protection Bureau discusses how a mortgage payment works. The principal is the amount a person borrowed for the home loan. You pay for the principal, plus the interest of the loan.
But though mortgages are generally safe, unpredictable factors such as recession may come into play. Therefore, one must not take more mortgage that they cannot handle.
In general, no matter what kind of debt, it will be wiser to pay for debt as quickly as possible to avoid incurring additional interest. However, there are also some technicalities to paying debts early.
Should you pay debt early?
The most important question is: are you allowed to pay off debt as early as you can? The quick answer is yes. No one is preventing you from paying off a credit card debt or a student loan early. Doing so can lift a heavy burden off your back and eliminates a huge amount of stress.
In addition to this, there are many advantages of paying off debt as early as you can.
Paying off debt early can give you financial freedom. It gives you room to wiggle in terms of monthly finances. You’ll have lesser bills to worry about every month, and you’ll soon find that it becomes easier to pay your monthly expenses.
A debt paid early can also save you money from paying large interest rates. Most of the time, when debt payment is delayed, a person becomes more buried in debt just because of the interest. Paying debt early eliminates this risk, and it also becomes easier to pay when there are lesser interest rates.
When a debt is paid off early, you maintain a good credit profile. An outstanding credit profile is essential for you to be able to get loans again in the future. Having a good credit profile will also give you good interest rates in your future loans.
Your savings account will also improve when you pay off your debt early. After removing all your debt payments, it will be easier to allot money for your savings. Building your savings account will help you avoid debts in the future as well.
The other side of paying debts early
Despite the advantages of paying a debt as quickly as possible, sometimes, it makes more sense to delay paying it off. For instance, sometimes, it is better to invest money into something that will earn high interest rates rather than instantly paying off debt. This way, you earn more money, and this money can be what you can use for paying off your existing debts.
Also, some agencies ask for penalty fees for early loan payments. So before paying off a loan early, ask the agency or financial institution if there is a penalty price. If there is, then it is better to wait. Again, if you have the extra money, it’s best to invest it into something that can make you earn more money.