Tuesday, 10 February 2015

Should debt be paid early?

If you have extra money, it’s always a question for people whether to use this money in paying off your debts or rather investing somewhere. Would paying off the debt early affect our credit score? Would it help us go ahead financially? Check these points before deciding on where to use your extra money.

Dangerous debts: 
Some debts are very dangerous for your financial health as they can result in jail time or monetary penalties .Such debts should be prioritized and paid off first. Examples of such debts are delinquent taxes, debts given to collection agencies etc.

Check the terms of the debt:
Check and see if there are penalties for paying off a loan early. Some creditors put a fee for the early repayment of the debt. Go back to your paperwork and check your fine print for prepayment fees.

Enough Cash:
After you strike through the dangerous debts checkpoint, next is the cash on hand. You want to have enough savings to cope during a financial crisis. Having cash reserves helps you to go through a rough financial patch without having to rely on more debt

Do the maths! If you are earning more from the after cutting taxes rate of the investment than what is piling up due to the debt interest rate, then it is better to go for the investment. Paying off a debt early may not give you a benefit- that is why you are better off using your extra money for investing. In fact you can use the money earned on the investment to pay off your debt in future.

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