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When it comes to paying down debt, you might have heard that paying off your balance as quickly as possible can help you save money in the long run. And this is often the case. If you pay off your credit card balance in full, for example, you’ll save on interest charges.
Generally, the longer you’re stuck paying back a loan or other debt, the more you’ll pay in interest over the lifetime of the loan. So it seems obvious that paying off your personal loan early would be a good idea — but not so fast.
Below, Select breaks down why personal loans are different from other types of debt and how paying one off early can impact your credit score and your finances.
How are personal loans different from other debt?
There are an abundance of financial products out there when you need money to pay for something. And each is a little different, so it’s practically impossible to have a one-size-fits-all approach to debt payoff. You’ll want to consider things like interest rates, billing cycles, loan terms and any fees as you make your plan.
Student loans are used for paying tuition and other costs associated with an education. Car loans are meant for helping you purchase a vehicle. Personal loans can be used for pretty much any expense — a wedding, a home renovation, a vacation and even debt consolidation. While you may need to explain how you plan to use the money on your application, there generally isn’t a hard and fast rule about how you use your personal loan.
Like a car loan or a student loan, you’ll receive a lump sum of money that you need to repay in monthly installments over a fixed period of time (known as the loan’s term) along with interest charges.
The repayment period for a personal loan can be anywhere from two to five years, but some are as long as seven years. Car loans are generally six years long on average, while student loans typically have a 10-year timeline, but it could take longer if you’re on an income-driven repayment plan.
Personal loans are different from credit cards because there is no set timeframe for paying back your credit card debt, though, the quicker you pay off the balance the less you’ll accrue in interest charges. (Ideally, you pay off your balance on time each month and never pay interest.) Credit cards also have a credit limit, which is usually much smaller compared to the average personal loan amount that borrowers request.
While the interest rate on personal loans is generally much lower than that of credit cards, it really depends on how much money you request and your credit score. Keep in mind that the higher your credit score, the more favorable your terms can be; a good credit score will help…
Read More: What Happens If You Pay Off A Personal Loan Early?