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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?

  • 7
    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
4

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.

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

  • I'd argue the interest rate is probably irrelevant. For the last 4 payments he is probably paying 99% principal 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
  • @JohnFx Even if it's a mortgage, just because amortization is used, does not mean that the interest rate doesn't apply. The interest rate is the same at the end as it is at the beginning. – stannius Nov 22 '16 at 18:42
  • The interest rate is the same. The amount of interest, and thus the benefit of paying off, drops as the compounding does. – keshlam Nov 27 '16 at 22:27
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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.

  • 2
    +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
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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.

  • 2
    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
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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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    Just because amortization is used on a mortgage, does not mean that the interest rate doesn't apply. The interest rate is the same at the end as it is at the beginning. So the OP would be saving the interest on the remaining balance. – stannius Nov 22 '16 at 18:42
  • @stannius - my point there is that you may not be saving much at all depending on how the loan was structured – warren Nov 22 '16 at 18:45
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    It might not seem like much, because the interest payments are so high early on and relatively smaller near the end. But it's the same underlying interest rate and every early payment at the beginning or end is saving interest at the same annual(ized) rate. – stannius Nov 22 '16 at 19:26
  • @stannius my parents' mortgage was something like $7 of principal the first payment (~$700 in interest), eventually down to that in interest at the end (and the rest principal). At the end of the mortgage, they'd only "save" about $30 in interest. This is why paying extra early helps so much. – warren Nov 22 '16 at 21:48
  • @warren You have cause and effect backwards. In year 1 of a $100k mortgage at 3%, you will pay $3k of interest. If your annual payments total $4k, that means your payments will be 75% interest. If you have only $4k left at the end of the mortgage life, you will pay $120 in interest that year. That means your payments will be 97% principal at the end of the term. In both cases, you pay 3% on any outstanding balance of the mortgage owed during the year. – Grade 'Eh' Bacon Nov 28 '16 at 14:37

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