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Choosing Between Loan Repayment vs. Investment

Estimated reading time: 3 mins

80% of Americans consider loans to be a necessity, according to the Motley Fool. From emergencies to high education costs, you cannot blame them for thinking the same. However, all loans work under the same principle – you will be spending money that you haven’t yet earned at a cost.

Once most people work their way into getting a loan, they spend years repaying it along with its interest rate. Perhaps the single concern that disturbs an entrepreneurial borrower is whether they should first start by repaying the whole loan or double-deal repayment and investment. While lifelong investments promise an increase in income, they can easily slow down your pace of paying down the loan.

Here are some insights to make the decision easier:

Paying the Minimum Loan Amount Is Necessary

Investment should never come before paying the minimal loan repayment amount, but it should be a decision concerning the extra cash that comes after paying the minimum requirement, according to loanpigusa. A simple missed payment could have dire consequences, both financial and psychological. For instance, missing a payment will not only lower your credit score but also require you to make late payment fees.

In some cases, these fees might be quite high leading to even tougher time offsetting the repayment for the next month, depending on the loan type you are repaying. Lastly, you could also risk foreclosure or even repossession. Once you are done with making the minimum repayment, it is the extra cash that should be used for investment or to make an extra payment to the loan.

Living Debt Free Does Seem Promising

“Pay down the debt and invest later” is the mantra for most people. The idea of living debt free is quite inviting. You will sleep tight knowing that no one can claim your assets in order to offset a loan you owe them.

Additionally, with all the debt cleared, you can proceed to invest as much as you can in building a healthy portfolio. The downside is that failing to invest might make it tough in situations of emergency when you need extra funds. You might, in fact, end up accumulating more debt and increasing the timeline it will take to offset the debt.

Investments Can Help Repay the Loan Faster

Typically, a single investment can mean more income and an even faster path to living debt free. As long as the investment yields enough returns, you can easily use it to pay down the loan. Additionally, investing in something will help to build a healthy financial future for you.

For instance, investing in a 401K account will make retirement easier on your side. On the other hand, the passive income you can earn from your investment might one day turn into your sole source of income, eliminating the need to rely on a paycheck.

You Are the Determinant

There is no clear-cut way for making this decision, and it all trickles down to you. For instance, if your investment is poised to bring in more profits than the interest rate of your loans, then it is wiser to invest. Additionally, factors like your happiness are also key to making the decision.

If paying down your loan first and living debt free will make you happy, why not do it? With enough commitment, patience and hard work, you can reach the end goal. You will easily pay down your liabilities and have a healthy enough portfolio to be ready for emergencies and embrace financial stability.

Conclusion

The decision relies on both math and psychology – happiness and financial freedom. Your best decision would be a choice through which both aspects intersect. Feel free to assess your situation in terms of pros and cons to make the decision easier on yourself.

 

 

About the author /


Simon is a creative and passionate business leader dedicated to having fun in the pursuit of high performance and personal development. He is co-founder of Applied Change, a Business Change consultancy based in the UK. Simon is also an Ambassador for Gloucestershire business. Simon is an Associate Member of the Chartered Institute of Professional Development.

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