The Benefits of Paying Off Your Loan on Time
So you’ve taken out a loan of some kind — auto, home, student or perhaps something smaller such as a personal loan. Many people are going to suggest you pay that loan off as quickly as possible. And there are some advantages to following that advice. But are there different benefits to paying a loan off right on time rather than early? There most certainly are, and they include the following:
1. You can strengthen your credit history.
Your credit score is based on several combining factors. The largest two factors are your history with revolving debt (such as credit cards) and installment debt (otherwise known as loans, because they’re paid off in installments.) With both factors, credit bureaus want to see a history of your managing the debt successfully.
If you have a credit card and pay at least the minimum balance each month, you show that you can manage that debt. If you pay off a loan too fast, however, your credit history with installment debt is diminished. Pay off your loan on time, exactly as scheduled, and the companies are now given a history of you paying a debt down perfectly for several months or years.
That history shows that you can manage planned debt just as easily as revolving debt. You now show that you are not a credit risk. Paying off your loan right on time has done far more good for your credit score.
2. You can improve your relationship with the loan company.
Banks are like any other business. When a client fulfills a contract with the bank exactly as the contract stated, the bank becomes more likely to make another contract with that client in the future. When you pay off your loan on time, you become that client, and any future request for a loan from that bank is nearly 300 percent more likely to be approved — and you’re likely to be able to get more money as well.
The same is true when it comes to personal loan companies. Many of the lenders who work with these companies only offer you a small amount of money the first time you get a loan from them. If you pay off that loan on time, however, the company and the lenders recognize that you are a responsible individual. If you need another loan at a future point, you will generally be offered a higher limit on the money you can receive. Pay that loan off on time as well and you may well get continued increases.
3. You can get tax breaks on interest.
For home and student loans, you can write off some or all of the interest (depending on how much you pay during the year) on your taxes. So depending on your current financial situation, you may well find that you are better off continuing to pay off your loan as scheduled even if you have the money to pay it off early. This benefit is situation-specific, however, so make certain you look at your particular tax situation closely. For some people, getting rid of the loan quickly may make more sense.