What to Expect After Paying Off an Installment Loan

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1. Your credit score may temporarily drop
2. You’ll have extra money in your monthly budget
- Start or add to an emergency fund. NerdWallet recommends working toward $500 and then striving for three to six months of living expenses.
- Pay off other high-interest debt. Putting extra money toward credit card or high-interest loan payments will help pay down that debt faster.
- Save for your next big goal. That could be a down payment on a house, your kids’ college education or a dream vacation.
3. Your debt-to-income ratio will drop
4. You may qualify for lower rates
What to do before paying off a loan early
- Check your loan documents for prepayment fees. Some lenders charge a fee to make up for the interest payments they’d miss out on if a borrower pays the loan off early. Not all loans include prepayment penalties, so make sure to read the fine print of your loan agreement.
- Weigh other financial goals. Funneling all your extra cash to pay down a loan early means you might have to sacrifice building an emergency fund, saving for retirement or meeting other financial goals. Take time to weigh all your options before committing to an early debt payoff plan.
- Adjust your monthly budget. Take time to review your budget before you make your final loan payment. You’ll get the biggest benefit from paying off a loan early if you have a plan for how you’ll use the extra money you’ll have each month. If you don’t need it for expenses, consider setting up automatic transfers to a savings account for the amount of your loan payment. That way, those freed-up funds can help you work toward another financial goal.
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