Think Twice Before Paying Off Your Debt Early

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payoffdebtWe hear that it’s important to be debt free as early as possible. No matter the debt, conventional wisdom says to get rid of the debt as quickly as you can, whether it’s a credit card or a mortgage.

However, even though you might want to be debt free, it doesn’t always mean that you need to pay off each loan early. Here are some things to think about before you pay off your debt early.

Tax Advantages

Some loans come with certain tax advantages. You might be able to get a tax deduction for the interest you pay on certain loans. Mortgages, student loans, and business loans all provide you with tax deductions for what you pay in interest.

No, a tax deduction doesn’t completely offset the interest you pay. However, it can be one way to reduce the impact of paying interest on these loans. It’s one thing to consider.

Low Interest Rate

There are some loans that come with low enough interest rates that you can make more by investing the money. If you have a mortgage at 4.25 percent, you might be able to do better by investing with a 6.5 percent. I have a student loan at 1.9 percent; my portfolio has returned close to 6 percent annually since getting that student loan. Paying off my loan early would mean a return of 1.9 percent, while investing the money I would put toward paying off that loan early provides me with a greater potential return.

This is something to keep in mind as well. If you have a low enough interest rate, and you can combine the fact that you are getting a tax advantage, you can do much better than paying of your debt early.

Of course, any high-rate debt should be gotten rid of as soon as possible. Credit cards definitely qualify as debt that should be paid off early — and as quickly as possible.

What are Your Priorities?

However, there are plenty of folks whose priorities are more in line with being debt free. And that’s fine, too. If you are most interested in getting rid of your debt and not having any of that hanging over your head, then paying off your debt early makes sense.

Consider your financial situation, and decide what works for your lifestyle. However, don’t assume that you have to pay off low-rate debt early to succeed financially. With the right approach, you might be able to invest the money you would have used to pay off your debt, earn a higher return, get a tax benefit, and come out ahead.