We will often here a lot of encouragement for people in debt to repay their loans early. However, we might wonder whether this is something that we should do or whether it does not really apply to us. There will be circumstances when it will be very useful to some people but also a situation where it will not be so useful and so it is good to understand a bit more about this so that you can decide for yourself.
Usually not the Case with a Student Loan
If you have a student loan then repaying it early is normally not beneficial. This is because the loan will be written off after thirty years, so any money that you still owe will not need to be repaid. This means that if you repay it early you will be paying back more than necessary. Most graduates never repay all of their student loan. This is because the amount that they have to repay is means tested and so if they are not earning over a certain threshold they will not need to make any repayments. Unless full repayments are made for most if the thirty years after studying, it is likely that the full loan will not be repaid and therefore repaying it early would have been a waste of time.
Might not be if you have an Early Redemption Fee
Some loans have what is called an early redemption fee. This is a fee which is charged if you repay the loan early. This is often included in fixed rate mortgages, for example, where you will be charged if you want to change providers or to repay the mortgage early. These can be quite small, perhaps just a small fee to cover the administration costs, but they could potentially be higher and perhaps even thousands of pounds. If this is the case then it might just not be worth repaying it early because the fee is larger than the money that will be saved by repaying it. When you repay it early, you save money on the interest that you will of paid. However, on a mortgage, that interest rate tends to be low compared with other types of loans and so you may not save that much in comparison.
Depends Where the Money is Coming from
It is also good to consider where the money that you are going to spend is coming from. You will need to think about whether you will be spending less on other things and whether this will leave you in a difficult situation. We all have essentials that we buy and we do not want to go without them so that we can repay our debts. You still need to cover your loan repayments, basic food, utilities, contracts, direct debits and rent or mortgage. Therefore, you need to make sure you have enough for these before you spend any extra of repaying loans. It might be the case that you can reduce how much you are paying or these by switching to cheaper providers and retailers but you will still need to pay for them.
Consider the Cost
It is good to think hard about how much the loan is costing you. Consider the cost of the interest that you pay and what difference it would make if you reduced how much you pay. If you are paying “100 a month, for example, them repaying the loan a year early would save you £1200 in interest which is a significant amount of money. Therefore, if you have to give up buying other things in order to find the money to repay the loan early, you might think that it is worth it so that you can save this much money. Of course, how much you will save will depend on how much you owe and how much you will be able to repay as well as the interest rate on the loan you are repaying.