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Shedding debt, while admirable, isn't always doable. But when stars align and you actually have the ability to repay a loan sooner than it's due, should you? And can you, without penalty?
The answer varies according to the loan type and your circumstances. Here's some insight from Greg McBride, senior financial analyst at Bankrate.com, a leading aggregator of interest rate information.
MORTGAGE
Can you? ... A home loan can be repaid ahead of its term, and there are many ways to do so. You can accelerate payments by paying more each month, with the extra money applied toward the principal. Or you can make lump-sum payments any time, but also be sure to designate that the money is to go toward the principal.
Should you? ... Not necessarily. Mortgages are usually a debt with the lowest interest rates, plus homeowners get tax breaks on the interest. Most home loans can be repaid early without penalty, except for subprime loans. Be sure to read the loan papers.
HOME-EQUITY LOAN
Can you? ... You can pay them off early, although check about a possible "early termination fee" charged on closing out a home-equity line of credit early, McBride said. You might instead consider paying down or paying off the balance, but leaving the line of credit open to avoid the hit.
Should you? ... Home-equity loans and lines of credit are the next rung up from the bottom on the debt ladder. While interest rates on these loans are higher than mortgages, they're still lower than other kinds of loans. Plus, losing tax breaks on the interest should be considered.
AUTO LOAN
Can you? ... Yes, you can repay the loan early, usually without penalty. Again, subprime loans are often an exception.
Should you? ... That depends, McBride said. If the loan is one of those exceptionally low manufacturer's deals, you might want to stick with it. But if you're carrying a high interest rate, it's definitely something to consider if you can swing it. You get no tax breaks on the interest, plus the monthly payments are high because auto loan terms are so short.
COLLEGE LOAN
Can you? ... You can repay early, and the timing might be good right now because the variable rate is climbing, effective July 1. You can repay a college loan as a lump sum or consider trimming the cost through debt consolidation.
Should you? ... Definitely something to consider.
PERSONAL LOAN
Can you? ... Yes, you can repay early and usually with no prepayment penalty. (Check your loan documents first to make sure.)
Should you? ... Heck yes, if you can. Personal loans and credit cards usually carry the highest rates going, and with no tax breaks on the interest, they are expensive financial burdens. The longer you carry them, the more they cost you.
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