One of the biggest debates that most people have about finances with regard to a credit union auto loan or credit union home loan, is whether or not they should pay off the loans early in order to gain interest rates savings. When you work with the knowledgeable and experienced customer representatives at St Anne Credit Union in New Bedford, you can quickly see whether paying off a loan ahead of time is in your best interest – or not.
If you come into some extra money, your first inclination might be to just pay off all your debt. However, there are certain situations where paying off debt is advantageous, such as paying down high interest credit cards and bank loans. Still, there are other times when paying it off as scheduled could be more beneficial. Learning the difference and knowing when to make a move toward becoming debt free and when to use your debt to build your credit is part of putting your money to work for you.
Things to Consider Before Paying Off a Loan
While we have already established that paying off high interest credit cards in order to gain interest rates savings and pay down your debt is a good idea, it is important to take a few things into consideration first. While paying off debt sounds like it would always be the best choice to make, over-extending yourself, financial opportunity losses and other hidden side-effects should be looked at before you dive in and pay everything off. Here are some things that you should look into before you pay off a loan.
- Will You Be Over-Extending Yourself? – You owe a couple thousand on your student loan, but you also have a lot of new expenses coming up in the next month or two. If you use all of the money that you have available to pay off your credit union auto loan, will you be able to survive the upcoming expenses? You don’t want to pay off one loan just to get yourself into a situation where you might be tempted to use a credit card with a high interest rate to cover essential bills – or get into another loan situation just to make ends meet. Figure out your finances for the next three to six months and determine whether or not this money would be better used for something regarding your immediate needs.
- Do You Have a Financial Back-Up Available? – Depending on who you talk to, there are different names for the same financial plan: back-up, emergency fund, emergency savings, etc. Having money set aside for emergencies – unplanned situations that require immediate funds – is a smart way to take care of your personal expenses. Your dog gets sick and requires medical attention at the veterinarian; the timing belt on your primary vehicle breaks; your bathroom springs a leak – there are tons of situations like these that often pop up out of nowhere. Having a back-up plan or emergency fund means interest rates savings compared to using a credit card. Take advantage of your Share Savings and other savings opportunities at your local New Bedford credit union to keep your emergency money separate from your checking account and other planned savings programs.
- What Is the Interest Rate on the Loan? – All debt is not equal, and while you might feel more in debt because you owe more on your credit union home loan than you do on your credit card, you might save more money in the long run by paying off those high interest rate credit cards first. If your credit union auto loan or home loan has a lower interest rate, you might consider paying it down rather than paying it off so you can use the rest of the money to pay off that expensive card or invest the money into a high yield money market or certificate of deposit account instead.
- Are There Any Penalties or Fees Associated With Paying the Loan Early? – Make sure to always read the fine print. Some loans include a penalty or early payment fee for paying off a loan before the due date. To make sure you don’t get hit with unexpected penalties or fees, go over the original loan paperwork and read the details to ensure that there aren’t any fees. If you aren’t sure, consider calling or visiting your lender to go over the paperwork in person. There may be ways of getting around the penalties, or you may save money in the long run by absorbing the cost of the fees to enjoy the overall interest rates savings on the life of the loan.
- Will You Lose Out on Tax Opportunities? – If you have a credit union home loan, you know the advantages associated with being able to take a credit on your income taxes for the interest paid on the loan throughout the year. Speak with your tax accountant or go over last year’s taxes to find out how much money you saved on your annual taxes as a result of the deduction for your home loans to find out whether or not it is worth it to pay it off and give up that opportunity.
To find out more about the advantages, costs and interest rates savings associated with getting a credit union auto loan, credit union home loan, Share Savings, credit union checking account, money market savings, certificate of deposit or other financial opportunity through your local New Bedford credit union, give us a call at 508-993-0011. St Anne Credit Union offers lots of great opportunities to members who work or live in Bristol or Plymouth counties in Southeastern Massachusetts.