Disadvantages of Paying Off Your Loan Early

Paying Off a Loan-
It can be tempting to pay a loan off early, especially if you find yourself with a little extra cash in the bank. But, is this always the best option when comes to making your money grow? Consider the following facts before making that crucial decision to pay off any large loan.

Fewer Liquid Assets

Liquid assets refer to the money you can quickly get your hands on in the case of an emergency. The most common form of a liquid asset is your savings account, but it can also include any stocks you have invested in. Stocks can be sold fairly quickly, and you can pull money out of your checking or savings at a moment’s notice.
When you pay off a large loan such as a mortgage, you are using money that could be put in the bank or invested into stocks. You may save a little money in interest charges by paying that loan off, but if you need cash in a hurry, it won’t be readily available. It can take many months to successfully sell a home.

No Tax Breaks

When paying off a mortgage, think about any tax breaks you might miss out on. You can get a deduction on your annual taxes for the interest you pay on a home loan. This write-off could be quite lucrative for many people. Paying the loan off early saves you when it comes to interest rates, but it may leave you with a higher tax burden at the end of the year. Carefully calculate the final result of each option before making any final decisions.

Miss Out on an Investment Opportunity

The best way to make your money grow is to let it work for you. This is done by investing. Being stuck with a high-interest rate can make you decide to pay a loan off early, but if you could lock in a more affordable mortgage rate instead, you might want to rethink that option. You could make more money by investing your hard-earned dollars rather than using them to pay off large loans. For example, If you have a locked-in interest rate of 3.5% and the average stock is paying 7%, your best option is investing.
But, an 8% interest rate is a different story. Car loans can also put you in this situation, but with these loans, you also have to figure in other factors. All factors of a car loan are referred to as the APR. The APR is the total cost annually to borrow the money, including all interest and fees.
Learning how to calculate APR on a car loan is essential for making smart money decisions about paying loans off early. According to Lantern by SoFi, “APR is a better metric for guarding the cost of borrowing than the interest rate alone.”
You want to make the smartest decisions possible when it comes to your money. Carefully consider all of this information before paying off those large loans.

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