In the last article, I talked about why you should consider not paying off your entire balance when it comes to low-interest loans. This was a general statement, and likely doesn’t apply to everyone. I don’t want to present one side of an argument and imply it's the better choice, instead, I want to present all the information possible and explore all elements of a financial situation so you can make an informed decision. As such, in this article, I’ll be exploring a few reasons why you may want to consider paying off low-interest debt.
As a general rule of thumb, you should always consider paying down high-interest debt as soon as possible, because the longer you wait, the more you pay in interest.
One of the first reasons you should consider paying down low-interest debt is stability. This is a relatively straightforward idea, if you pay off all your debt, low interest or high interest, you won’t have to worry about another monthly expense. So, in the case of an emergency, or if you lose your source of income, you won’t have an additional expense to worry about.
If you keep debt, regardless of interest, and lose your source of income, paying off your debt probably isn’t your first priority, instead you would likely focus on food, shelter, and other necessities. As such, you risk defaulting on your loan (when you miss multiple payments in a row), which is extremely harmful to your credit and takes years to recover from.
This concept relates to the next reason why you should consider paying off low-interest debt: peace of mind. Having debt, no matter how financially prudent it may seem, is not intuitive, so while it may make sense to keep low-interest debt, it will likely stress you out to think about a huge looming negative balance staying around for years to come.
As such, paying off your entire balance in one go could release a lot of financial stress/tension, and make you a lot calmer. Similarly, having no debt is also very freeing; if you’re having trouble with a difficult boss, you won’t have to stick around and keep working in a toxic environment just for the paycheck, you can afford to simply pack up and quit. You can also theoretically pack your bags and just leave town if you’re debt-free.
The last couple reasons why paying off low-interest debt could be beneficial are more tangible than the last few: firstly, debt is a liability and a negative on your personal balance sheet. This means your “net-worth”, your assets minus your liabilities, will be significantly lower than it could be. This isn’t too harmful aside from personal perception, but it could be a red flag to lenders. This leads us to the last reason why you should consider paying down low-interest debt.
Having a large amount of debt, no matter how low interest, could be perceived negatively by creditors and institutions, which would make taking out any essential loans difficult. Having a significant amount of debt, and asking to take on, even more, is a red flag to lenders because it increases the chances of default (the more debt you have, the more likely it is that you would have difficulty paying it back).
In short, there are a number of reasons why you should consider paying off all your low-interest debt, ranging from peace of mind to stability. If you’re worried about your income in the future or prefer to be completely untethered by money, then paying down all your low-interest debt might be worth considering. Every situation is unique, so consider all available factors when looking at how to handle debt. If you have any further questions or requests, please feel free to email me at financeforteens.org@gmail.com. Thanks for reading, and I’ll catch you in the next one!