Pay off loan or use money for house upgrades

seruby · ‎03-28-2017

I'm going to guess my score is around 680-690. I have 4 CCs, with a total line of about 41,000 - and my util is always brought down to 1%.

I have a few loans as well:

Student loan - $5000 remaining. 3.375%, $110/mo, final payment due in 2021

Auto - $12,000 remaining, 2.29%, $410/mo, final payment due in 2019

Mortgage $289,000, 30 year @ $2200/mo

Personal ($8000 loan, 24 month, 15.75%, $400/mo, taken out Feb 2017).

I currently have a plan in place to pay off the $5000 remaining on my student loan by June and my personal loan by August by putting extra toward them. I took out the loan for about $3500 more than I needed, so I was thinking of putting the excess back into it.

However, I've been reading that paying off loans early could decrease your credit score. So now I'm debating that idea. I know it'll save more in interest, but mathematically, it doesn't make much sense.

To pay off the student loan early, I would be paying about $4,400 extra over the next 3 months and saving about $250 in interest. To pay off the personal loan early, I would be paying $8000 of the next 5 months and saving about $1,100 in interest. So $12,400 in extra payments to save $1,350 in interest doesn't make much sense in my eyes.

Also, my credit report has a few negatives that won't drop off until 2019 anyway, so even if the loans were paid, the negatives would still be there. So I'm thinking instead of putting the extra money toward changing up or fixing up things around the house.

Aside from not having the loans anymore, is there any benefit to paying them off early, or should I just save the money? What would you do in my shoes?

Anonymous · ‎03-28-2017

I'm going to guess my score is around 680-690. I have 4 CCs, with a total line of about 41,000 - and my util is always brought down to 1%.

I have a few loans as well:

Student loan - $5000 remaining. 3.375%, $110/mo, final payment due in 2021

Auto - $12,000 remaining, 2.29%, $410/mo, final payment due in 2019

Mortgage $289,000, 30 year @ $2200/mo

Personal ($8000 loan, 24 month, 15.75%, $400/mo, taken out Feb 2017).

I currently have a plan in place to pay off the $5000 remaining on my student loan by June and my personal loan by August by putting extra toward them. I took out the loan for about $3500 more than I needed, so I was thinking of putting the excess back into it.

However, I've been reading that paying off loans early could decrease your credit score. So now I'm debating that idea. I know it'll save more in interest, but mathematically, it doesn't make much sense.

IMHO I wouldn't worry about the drop in points, some are reporting a loss of 5-10. The savings should outweigh the drop in score. Additionally, at least in my experience, being able to tell your future lendors that you've paid off your loans early and you "don't mess around" and pay things down has been extremely helpful for me. I've gotten prime rates while being in the low 600s with high util for auto loans because I've purchase and paid down nearly 5 cars now. My goto banks are BofA, Suntrust, and any manufacturer that has their own financing.

To pay off the student loan early, I would be paying about $4,400 extra over the next 3 months and saving about $250 in interest. To pay off the personal loan early, I would be paying $8000 of the next 5 months and saving about $1,100 in interest. So $12,400 in extra payments to save $1,350 in interest doesn't make much sense in my eyes.

If the savings aren't beneficial enough for you then you've already answered your own question...

Also, my credit report has a few negatives that won't drop off until 2019 anyway, so even if the loans were paid, the negatives would still be there. So I'm thinking instead of putting the extra money toward changing up or fixing up things around the house.

If you can get a decent return on the repairs, go for it. If you have no intentions of borrowing in the near future, then you can put it towards the home and pay off the accounts later.

Good luck, I went through a similar situation (without the negs), and I can tell you that, even though my home is built and is beautiful and I love it.... I think I enjoy my life more now knowing that I've paid down a substantial amount of my monthly obligations. It's a weight off my shoulders for sure.

Aside from not having the loans anymore, is there any benefit to paying them off early, or should I just save the money? What would you do in my shoes?

Anonymous · ‎03-28-2017

You may be under the impression that you have two options: either to continue to pay interest on the loans, or to pay them off entirely.

There is a third option. And that is to pay the loans down a great deal, but still leave a small balance on them (e.g. $60). This is called "pre-payment." It results in the due date for the next payment being pushed way into the future. You end up paying off most of the principal, and hence paying almost no further interest; but you still get to keep them open for the full term of the loan. You'll have to double check with your lenders if they permit this, but many lenders do.

Because I am highly allergic to high interest rates, I would (if I were you) pay down the personal loan ASAP, even if it ultimately results in a closed loan. Paying 16% interest is a terrible financial move right now if you can avoid it. The student loan has a very low rate by contrast and should not be the target of a payoff.

enjoimorenow · ‎03-28-2017

Usually score drops come from paying off all installment accounts and not having a new one. As long as you keep at least one, or open a new installment loan then your scores should be fine.

What kind of repairs are you wanting to do? Are you going to do them yourself? You could pay off your current loans, then apply for a 0% interest card, or use Lowes 18 month 0% to do some/most of your repairs and then pay those down over the next year. Just an option that could save you some money on interest, get your loans paid off, and still allow you to do some house repairs.

BK 7 Scores (08/2016): EQ-528. TU-486. EX-530.
Current Scores (04/2022): EQ-717. TU-735. EX-736.

seruby · ‎03-28-2017

@enjoimorenow wrote:
Usually score drops come from paying off all installment accounts and not having a new one. As long as you keep at least one, or open a new installment loan then your scores should be fine.

What kind of repairs are you wanting to do? Are you going to do them yourself? You could pay off your current loans, then apply for a 0% interest card, or use Lowes 18 month 0% to do some/most of your repairs and then pay those down over the next year. Just an option that could save you some money on interest, get your loans paid off, and still allow you to do some house repairs.

I should be okay then with at least one installment loan because of the mortgage, right?

Some of it I would do with friends, some of it, I would hire someone. First, I want to expand my patio and add a firepit, and enclose the existing patio to make it a 3 season room (it already has a few beams and a roof). Other items down the road are changing some existing lighting fixtures, removing the light in one room and add recessed lighting, and remove a soffit in the basement.

enjoimorenow · ‎03-29-2017

Yes, you would still have the mortgage, and I think your car payment right? So you should be fine on installment loans. If anything, keep the student loan as the payment is small and the interest is low. I'd pay off the personal loan for sure.

You can probably do a combo of a 0% intro offer for the house things you have to hire out, and a 0% store offer from Lowes for the stuff you plan to do yourself. At least then you would have time to pay them off before being hit with interest. Just a suggestion so that you could get that personal loan paid off but still do your home renovations as well.

You can also do what dixie suggested and see if you can pay down the majority of your loan now leaving a small balance to avoid interest and keep it reporting.

BK 7 Scores (08/2016): EQ-528. TU-486. EX-530.
Current Scores (04/2022): EQ-717. TU-735. EX-736.

SouthJamaica · ‎03-31-2017

@seruby wrote:
I'm going to guess my score is around 680-690. I have 4 CCs, with a total line of about 41,000 - and my util is always brought down to 1%.

I have a few loans as well:
Student loan - $5000 remaining. 3.375%, $110/mo, final payment due in 2021
Auto - $12,000 remaining, 2.29%, $410/mo, final payment due in 2019
@Anonymous $289,000, 30 year @ $2200/mo
Personal ($8000 loan, 24 month, 15.75%, $400/mo, taken out Feb 2017).

I currently have a plan in place to pay off the $5000 remaining on my student loan by June and my personal loan by August by putting extra toward them. I took out the loan for about $3500 more than I needed, so I was thinking of putting the excess back into it.

However, I've been reading that paying off loans early could decrease your credit score. So now I'm debating that idea. I know it'll save more in interest, but mathematically, it doesn't make much sense.

To pay off the student loan early, I would be paying about $4,400 extra over the next 3 months and saving about $250 in interest. To pay off the personal loan early, I would be paying $8000 of the next 5 months and saving about $1,100 in interest. So $12,400 in extra payments to save $1,350 in interest doesn't make much sense in my eyes.

Also, my credit report has a few negatives that won't drop off until 2019 anyway, so even if the loans were paid, the negatives would still be there. So I'm thinking instead of putting the extra money toward changing up or fixing up things around the house.

Aside from not having the loans anymore, is there any benefit to paying them off early, or should I just save the money? What would you do in my shoes?