4 Pros & Cons Of Paying Off A Loan Early

Last updated on June 23rd, 2022 at 04:25 am

This article provides important information to unemployed individuals, people with bad credit, and those looking for cash loans NZ in the shortest time possible. In most cases, these candidates will only be eligible to take out a short-term loan for a limited amount of money, sometimes also called a payday loan. Five banks in New Zealand are authorized to dispense bank loans for longer durations and they are ANZ, ASB, BNZ, Kiwibank, and Westpac. In this article, we discuss the different advantages and disadvantages of paying off a loan early taken from a non-bank or financial institution. 

1. Pro: Early Loan Repayment Leads To Savings

There are two types of loans that people can take out. The first is a loan from one of the five banks in New Zealand. The second type of loan is one taken from a non-banking financial institution. Traditional banking rules and regulations allow banks to financially pursue an individual if their bank account is within the same bank.

Non-banking financial institutions can offer more personalized services because they are not as rigorously regulated as traditional banks. This means that non-banking financial institutes can offer their clients much better interest rates because they do not have to worry about distributing profits to their shareholders via dividends like traditional banks. To put it in simpler terms, you can expect the interest rates to go up with a non-banking entity if you delay paying your loan for too long. In other words, the sooner you pay back your loan the less interest you will have to pay. 

2. Con: Other Funds Might Get Used To Payoff A Loan Early

Financial advisors always advise families to keep cash savings resources dedicated towards specific larger expenses. Some examples of these savings are retirement plans, college tuition expenses, or savings for important family events. Under normal circumstances, you should not have to divulge into your savings no matter what the reason. There is a possibility that you might have to decide between using up your savings to pay off a debt. 

You do not need to decide between using financial resources dedicated for other purposes to pay off a loan if your finances are in a good condition. Financial experts agree that it might be worth it in the long run if you have to sacrifice a bit of your savings to pay off a debt. 

3. Pro: Improvement In Your Credit Profile

Paying off a loan early translates into an account closing in good status. By paying off the loan early you have removed the risk to your credit score due to late or missed payments. This will translate into a lower debt-to-income ratio, a primary unit of measurement used to make credit decisions. The results might not be apparent the very next day but you can expect to get better rates the next time you apply for a car loan or a personal loan. 

4. Con: There Might Be A Penalty

With some non-banking financial institutions, you might be faced with a prepayment penalty if you decide to pay off a loan early. To help you make the right decision calculate which amount is lower, the prepayment penalty, or the savings on the interest. You have to remember that the only way that these establishments can make money is through interest. To avoid such situations always make sure you know all the terms and conditions of the loan from the beginning.