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I only have 4 payments left on my loan and have recently sold an asset so now have enough cash to pay the remaining balance.

Is there any benefit to paying off the loan fully or as I've only got a few payments left should I just continue to pay it off as normal?

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5  
Depends on what type of loan this is. Mortgage? Student loans? Vehicle? And who holds the loan. Bank? Sallie Mae? Your grandmother? And the interest rate. Probably the nuisance factor makes it not worth it, unless the rate is quite high. – kajaco Oct 1 '10 at 16:17

5 Answers

up vote 2 down vote

I've done this before, to me if you have the money making two more installment payments just feels annoying.

Is there any real benefit? Probably not.

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+1 for probably not. Lots of major loans I am aware of are loaded with interest paid first, so you final payments are mostly principle and it doesn't save you money to hurry up the last 4. – MrChrister♦ Oct 1 '10 at 18:26
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'Principal', not 'principle'. – DJClayworth Jan 7 '11 at 19:42
up vote 2 down vote

The benefit is that you don't have to pay interest for those 4 months. If your each monthly payment is $1000 and you have 4 payments left your pay-off amount maybe like $3980. Depends on you interest rate.

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I'd argue the interest rate is probably irrelevant. For the last 4 payments he is probably paying 99% principle anyway. – JohnFx Oct 3 '10 at 3:10
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you are assuming it's a 30 year mortgage. IF it was a 12 month loan with high interest it might be worth paying it off. I am just answering a question. It's up to Adam to decide if it's relevant or not. – Vitalik Oct 3 '10 at 3:24
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@JohnFx I don't want to be nitpicky, but on a Finance site we should be getting this right: it's 'principal', not 'principle'. – DJClayworth Jan 7 '11 at 19:41
@DJCLayworth - I appreciate the correction. Too late to edit it now though. Thanks for pointing it out though. – JohnFx Jan 7 '11 at 20:40
up vote 2 down vote

This would depend on:

  1. Is there any prepayment penalty involved?

  2. Assuming the interest calculation is on a reducing balance basis, the interest component in the last 4 payments would be much less [in the range of 1% of the 4*EMI left].

  3. The hassle involved in calling up your loan servicing agent and having them make an exception processing.

Thus even though there may be no foreclosure penalty, it is still advisable to wait for few months for the loan to be paid off by itself as this would avoid you the hassle in get out of the way workflow by Bank. Remember most of the times banks are efficient in normal processing and make quite a few errors in out of the way processing. For example if its a Mortage, releasing your property title papers would get triggered automatically on normal closure, but on forced closure, someone has to initiate the process and it may get forgotten and would mean more effort for you to get it right.

Best is to leave it to be closed on its own.

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6  
you men prepayment penalty? – Tim Oct 1 '10 at 13:48
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It's not even clear if the question is about a mortgage or just a regular loan. In my experience (i've refinanced and sold a few properties) there are absolutely no "processing" issues of paying off your mortgage early. Remember each sale and refinance is a pay off. As for "prepayment penalty" it's very rare now and probably illegal in some states. – Vitalik Oct 1 '10 at 16:15
What is meant by "foreclosure" penalty? I've never heard of this, I think its a misnomer. I'll remove down vote if you correct or define the term... – CrimsonX Oct 1 '10 at 16:40
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Its a terminology issue. In certain countries (Asia and India in particular) Prepayment typically means paying of part of the loan outstanding. Foreclosure means paying of the full balance and closing it earlier than agreed term. However I understand that US & UK the terminology used is Part Prepayment and full prepayment. I have made edits to the answer and replaced foreclosure with prepayment – Dheer Oct 1 '10 at 16:59
up vote 0 down vote

The earlier extra payments are made on a mortgage, the more effect they have on saving you money. You will still save some money by paying it all now. Take a look at an online amortization calculator and see if the difference is enough to motivate you.

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How do you know this is a mortgage? – kajaco Oct 1 '10 at 16:15
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That's a really good question. – James Roth Oct 1 '10 at 18:44
up vote 0 down vote

So long as there is no pre-payment penalty (already mentioned that it is illegal in some states - and very uncommon in any event), and presuming it is not a front-loaded loan like a mortgage, then yes - paying it off now is better.

Unless you have no other cash handy for emergencies (ye olde 'emergency fund'), paying loans off early is always a Good Idea™, in my opinion.

Presuming you have no other loans with a higher interest rate, then paying this one off now is likely your best bet.

If this is a front-loaded loan (like a typical mortgage), then the 'early' payoff is not going to be a major savings (maybe only a couple dollars), so focusing your cash on creating/boosting an emergency fund and/or purchasing something like an IRA (for both retirement and tax purposes) would be a good choice, too.

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