Have a chunk of change you’ve been thinking about using strategically? Sometimes, the obvious move isn’t the one that’ll actually do the most good — and that’s especially true if you’re thinking of paying off a loan.
These four quick questions can help you decide whether early payoff actually makes sense right now (or if your money might work harder somewhere else).
1. Is There a Penalty for Paying Early?
Some loans charge you for getting ahead. They might call it a prepayment fee, early repayment charge, or interest guarantee – but the result is the same: you owe money just for being responsible.
Don’t guess. Dig out your loan agreement or call your lender directly. If you can’t find an answer in 10 minutes, it’s worth asking before you act. That fee might be small – or it might wipe out the benefit of paying early.
2. Will This Leave You Cash-Strapped?
Is your emergency fund ready for anything life might throw at it? If it could be bulked out a bit more, consider directing all or some of your excess cash into that account.
We can’t predict the future: And if something goes wrong next month, you might find yourself swiping a credit card at 24% interest just to cover groceries. Building your safety net is always a good move — especially when it’s not fully developed yet.
3. Are You Carrying Higher-Interest Debt Somewhere Else?
Paying off something completely might make you feel powerful, but pump the brakes: If one account has a higher interest rate than another, it usually pays off to clear that high-interest debt.
A simple way to determine which to pay off first is to understand which debt costs you the most. That’s where your extra dollars will do the most work.
4. Could This Money Do More Elsewhere?
If you’ve been aggressively paying off that debt using your current resources, assigning your extra funds to a greater purpose might be a good call, too. Consider using your excess cash to:
- Contribute to retirement (especially if there’s a 401(k) match on the table)
- Pay off smaller debts for momentum
- Or split the money across a few priorities to boost all of them at once
Only Pay Early if it Benefits You
Getting an account $0 is a great feeling, but that feeling is fleeting — you still might yet have greater challenges to overcome. Refocus on strategy, not speed: If early payoff fits your bigger plan, go for it. If not, that’s okay too.
Before you send that extra payment, remember these four questions. A little clarity now can help you feel even better about whatever you choose to do next.