There are many reasons to borrow money through a personal loan, and the good news is that if you make monthly loan payments on time, the borrowing shouldn’t hurt your credit score while you do. build up a large credit card balance. could damage your score. If you have personal loan debt but your circumstances allow you to make more than your minimum monthly payments (for example, your income has increased), you may want to inject some extra money into this loan to get rid of it. sooner and save money. on interest.
But is paying off a personal loan sooner a good idea? Or do you prefer to use cash to increase your savings account balance?
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What does your emergency savings look like?
Your primary financial goal, regardless of your financial situation, should be to have an emergency fund with enough money to cover three to six months of living expenses. This way, if you lose your job or run into unexpected bills, you can cover your expenses without going into debt or falling behind on your financial obligations and damaging your credit score.
Now let’s say you are sitting on extra money each month that could go into your savings or eat into a personal loan balance. To decide where this money should go, all you need to do is ask a simple question: What does my emergency fund look like?
If you have enough savings to cover at least three months of bills, you may want to use your extra cash to pay off your personal loan. But if you’re running out of emergency savings, this should come first.
The great thing about personal loans is that they usually have fixed interest rates. You shouldn’t feel like you have to prepay your loan lest your interest rate increase over time. In fact, if you stick to your loan schedule, you may find that it helps you build credit – those timely payments are recorded and added to your payment history, the most important factor in calculating your credit score.
Is there a downside to paying off a personal loan early?
While it is possible for a personal loan to include a prepayment penalty clause, most of these loans do not penalize you for paying off your balance earlier than expected. If you’re ready for some emergency savings, there’s no reason not to use your available cash to cancel that loan faster. While personal loans aren’t the worst type of debt to have, neither are they the best, so the sooner you can get rid of yours, the sooner you can enjoy the freedom of not having a credit balance. loan pending. your head.