When it comes to financing a purchase, few things can seem more innocent than a 0% interest loan.
After all, signing up for a low or no-interest loan just doesn’t feel quite as painful as parting with a lump sum of your hard-earned cash.
What you might not realize, however, is that by financing a purchase, whether at 20% interest or 0% interest, you’re hindering one of your most powerful resources: your income. And the more of your income you tie up in monthly debt payments, the less financial freedom you’ll have.
In fact, before I go any further, let’s address the question that likely led you to this article in the first place: should I pay off a 0% interest loan early?
Yes, if possible, you should pay off a 0% interest loan early. Doing so will not only lower your financial risk, but also increase your monthly financial margin, which will, in turn, improve your ability to save, invest, and prepare for the future.
With that in mind, for the rest of this article, I’m going to cover seven of the best reasons why you should pay off a 0% interest loan early.
Let’s dive in.
1. You’ll Have More Financial Margin
If you’ve been a reader of Be The Budget for a while, you’ll understand the need for something called financial margin.
This is essentially the gap between your monthly income and your monthly expenses that provides freedom in your financial life.
The two main ways to increase your financial margin are to either decrease your expenses or increase your income. I’m partial to the pie analogy of either eating smaller slices or getting a bigger pie.
A great way to decrease your expenses would be to rid yourself of the monthly payment that comes with any loan, regardless of your interest rate.
It’s important to have a little breathing room in your budget to avoid tapping into savings like your designated emergency fund.
When a heatwave hits and your utility bill spikes unexpectedly or your grocery bill goes a few dollars over your budgeted amount, you’ll be able to tap into this financial margin instead of slowly draining your savings over time.
Overall, increasing your financial margin by paying off your 0% interest loan early increases your financial margin, and thus, makes your entire financial life easier
2. It Will Simplify Your Finances
These days, we all seem to have a lot of plates spinning everywhere we turn. For that reason, more people than ever are looking for life hacks that will make their day-to-day easier.
It’s no different when it comes to personal finance.
When preparing your budget and paying bills, the fewer obligations (i.e. debt payments) you have, the easier your life will be.
Generally speaking, the less complicated your finances become, the more likely you are to see progress along your financial journey.
When seeking to simplify your finances, paying off a 0% loan is an easy way to eliminate a line item in your monthly budget.
Think of it this way, the fewer debt payments you owe, the fewer bills you’ll have to pay. And the fewer bills you have to pay, the easier it will be for you to manage your entire financial life.
Want to pay off debt, simplify your finances, and save more money? You’ll love some of these other posts:
- Save Money Or Pay Off Debt? (Here’s What We Did)
- How To Get Out Of Debt Fast (Even On A Low Income)
- 7 Killer Ways To Simplify Your Financial Life
- 7 Easy (And Effective) Budgeting Tips For Beginners
- How To Stick To Your Budget: 21 Simple Tips
- Should I Sell My Car To Pay Off Debt?
- 21 Tips To Pay Off Credit Card Debt FAST
3. You’ll Have More Money To Invest
Here’s where hidden costs of zero percent interest debt really start to emerge.
No matter how small each payment is on your loan, you’re robbing yourself of the chance to invest earlier in your financial journey.
Without going too far down the economics “rabbit hole,” we can all agree that our dollars will be worth more in the future when invested wisely.
Why would we, then, choose to continue pumping our hard-earned dollars into a loan over a longer time instead of investing sooner and actually earn interest?
That’s right, you can turn the table on these expenses to earn more money instead!
Investing in financial vehicles like a Roth IRA or even something as simple as an index fund is an important step towards financial freedom. You can also take the opportunity to increase your contribution to your employer’s 401k program and take advantage of any employer matching benefits.
The earlier you invest, the more interest you’re able to earn over your lifetime.
With this in mind, it’s important to pay off a 0% interest loan early in order to maximize your ability to invest, and thus, capitalize on the power of compound interest.
4. It Lowers Your Financial Risk
Let’s talk a little about financial risk and how a low or no-interest loan affects it. After all, a 0% interest rate doesn’t seem very risky at all.
When looking at your financial “house,” let’s envision your income like pillars holding up your expenses. Now, let’s imagine something were to happen to one of those pillars. The more weight they are holding up (i.e. the more expenses you have to pay) the more likely your house is to collapse.
On the other hand, the lighter the load (i.e. the fewer expenses you are obligated to pay) the easier it will be to keep your financial house standing.
Expenses can be necessary costs like rent, food, transportation, and medical care. They also include your debts, which can add undue pressure to your financial life.
In the same way, extra weight may jeopardize the integrity of your home, higher financial risk increases the chance of a financial disaster when the unexpected happens.
To put it simply, fewer payments equate to more financial stability.
If something unforeseen rears its ugly head, like a temporary job loss or furlough, loss of income due to a medical emergency, or an immediate expense due to a totaled vehicle, you’ll be better prepared to handle the situation financially.
You’ll be able to absorb urgent costs more easily, and you’ll be able to live more comfortably for a longer period of time on a reduced income. The fewer payments you are responsible for, the better off you’ll be.
Armed with this knowledge, you should seek to eliminate all debts, even 0% interest loans, as soon as possible and reduce your overall financial risk.
5. It Increases Your Net Worth
Net worth remains one of the best metrics of your financial health.
By comparing your assets to your liabilities, you can determine how healthy your finances are.
To find your net worth, simply combine the value of all investments and assets, and subtract any outstanding debts and liabilities.
By using this formula, even high earners can be surprised that, despite being a homeowner with generous savings in the bank, they may have a negative overall net worth due to outstanding debts!
All loans and other forms of debt, including those at 0%, are considered a liability.
Put simply, if it has to be paid back, it’s a liability.
Once it is paid off, however, your net worth increases.
You can use this number to tell if you are truly operating your personal finances in the positive.
Conversely, you may also be seeing red when your debt outweighs your current assets.
The exercise of calculating your net worth also provides you with an excellent opportunity to identify areas that are affecting your finances negatively, like overspending.
Net worth is an important tool because it is a true test of the quality of your wealth. And one of the easiest ways to increase your net worth is to pay off a 0% interest loan.
6. Reduced Stress
Here’s the thing, debt adds stress to your financial life. Fortunately, speaking from personal experience, the sooner you pay it off, the less stressful your financial life will be.
As humans, we carry something I like to call a “mental load.”
This consists of all the obligations that float around your head at any given time–upcoming bills, grocery lists, kids’ soccer schedules, or even thinking about what’s for dinner tonight.
If you’ve ever laid in bed at night processing through all of your mental checklists, you’ve been examining the contents of your mental load instead of getting some rest.
It’s been proven that stress can affect your sleep patterns, your mood and can even affect physical health.
Fortunately, combined with healthy coping skills, paying off these seemingly innocent debts early can lessen your stress over time. (I’ll say it once again, I’m speaking from personal experience.)
7. You’ll Have More Money For The Things You Enjoy
Once you pay off a zero percent interest loan, you’ll have access to the extra bandwidth in your budget to spend on more enjoyable pursuits.
In other words, the less money you owe, the more money you’ll be able to pay cash for things you enjoy like travel, dining out, and hobbies.
It’ll also be easier to cash flow projects like home improvements that make for a more enjoyable environment for your family and hopefully increase your property value.
You could even put the funds toward starting your own side hustle!
What better way to reverse your fortune than to spend your hard-earned cash on ways to create more wealth!
You can also have extra funds for giving. If you’ve been looking for opportunities to share abundance with those around you and support worthy causes, paying down your loan early is a fantastic way to free up a bunch of extra cash every month.
Although buckling down to pay off a 0% loan ahead of schedule has many benefits, repurposing that payment for more enjoyable activities is one of our favorite reasons!
The allure of 0% interest loans has trapped people in the shackles of debt for decades.
This tactic by retailers isn’t even limited to certain industries. It can be used for furniture, vehicles, education, tools, and even groceries! But don’t be swayed by this sneaky tactic when doing research for your next purchase.
By paying off your zero percent interest loan, or avoiding them altogether, you’ll improve your overall financial health, reduce your financial risk, and who knows- maybe even sleep better at night!