Should I Pay My Personal Loan Early Or Keep Generating Savings?


Our elders always advised us to pay off any debts as quickly as possible and be debt-free. However, is it wise to pay off the debt at the expense of replenishing all the savings? What if we need funds for a rainy day? It is essential to balance managing debts and to save money. In addition, personal loan interest rates do not fluctuate, so the borrower does not need to worry about higher interest rates in the future. However, if the person has a large sum of money in their savings, keeping them idle is also not ideal. Repaying debt should come first in such circumstances. This article will examine whether it is better to pay off personal loans early or keep saving.

Pay off personal loan vs. Generate savings? Which is better?

Before prioritizing between repaying a personal loan and saving, it is essential to consider the following factors: 

  • Budget:
  • An essential factor to consider in determining how much money remains after paying off all the monthly expenses. To decide whether to pay off a personal loan first or generate savings, every person should consider their financial position. Individuals must create a budget, evaluate their daily expenses and liabilities, and decide how much money they have leftover. If a lump sum remains, a part may be used to repay the debt. Budgets must also account for any goals the person wishes to achieve, such as paying for a child’s college education or buying a car. Although the person may not need funds now, preparing for such funds in advance is better than taking out a loan at higher interest rates in the future. 
  • Emergencies:
  • We can never plan for unforeseen emergencies, whether medical, business, or job-related, despite our best efforts. In addition, financial security becomes more vital as retirement approaches. This is why it is crucial to plan. In this way, if the individual needs funds soon, they do not have to add more debt and can use the cushion from their savings account to cover the expenses. According to experts, every individual should have an emergency fund covering 3 to 6 months of their living expenses. 
  • Prepayment penalties:
  • Although getting rid of debt as soon as possible is ideal, an individual must carefully research the terms and conditions of the loan. Sometimes, if the borrower pays off their loan amount before the schedule, they may be subjected to specific penalties. Personal loans often include a lock-in period, after which the borrower can repay the loan without attracting any penalties. 
  • Interest rates:
  • It is crucial to consider the interest rates attached to the liabilities when evaluating them. Personal loan interest rates vary as per an individual credit score, current income, and more. Thus, some debts have higher interest rates and are more expensive than others. When a person has such debts, it is advisable to pay them off as soon as possible to relieve the stress. Additionally, it creates more room for savings. With low-interest debt, paying it off regularly and consistently should be sufficient to reduce the personal loan and maintain a good credit score.

Final thoughts

By reading the above article, you will understand that there is no single correct answer when choosing between saving or paying off a personal loan early. The only solution is to maintain a balance. Savings instill discipline, and repaying your loans helps you become debt-free. To better plan repayment strategies, companies even offer the facility of a personal loan EMI calculator. Thus, research carefully and plan your finances accordingly.