During the spring, it’s common to see a whole range of articles on the internet about your tax return–but very few of those articles will tell you if you should use the return to pay off personal loans. They may advise you on the latest technical gadget to splurge on, or where you should take your vacation courtesy of your overpaid tax bill, but they are pretty mum when it comes to paying off debt. So is it wise to use a tax return to pay off personal loans? Following are some criteria to help you decide if it will work for you:
Do You Have an Early Payment Penalty?
Some personal loans come with an early payment penalty. This means that if you pay your personal loan off early, you could come out paying a fee. Although it’s more common to have an early payment penalty on a large secured loan, such as a mortgage or student loan, some borrowers with less than outstanding credit may have an early payment penalty on a personal line of credit. This amount varies, but one standard fee is six months’ interest on the outstanding principal. If this is the case for you, you’ll have to see if paying it off early actually costs more money than paying it off as scheduled.
Which Loan Has the Highest Interest Rate?
You may select to pay off the debt that has the highest rate of interest. In this case, you may elect to pay off credit card debt first, and work on paying off your personal loan if it carries a lower rate of interest. On the other hand, since the Credit CARD Act of 2009 has been passed, credit card lenders have been severely restricted on retroactive rate increases. In addition, borrowers who maintain good payment records for six months may be eligible for a lower interest rate. Therefore, maintaining a steady payment for your credit cards and paying off a personal loan might make more sense in your case.
How Can I Reduce My Tax Payments?
Finally, the smartest strategy you can implement is to reduce the amount of taxes you are paying, beginning right now. If you have overpaid by a considerable amount of money, you are essentially giving the government an interest-free loan on your money. Instead, find out how you can reduce your payments so you don’t overpay, and spend that money on paying down your debt throughout the year. If you have more cash flow during each month, you will reduce your need for a personal line of credit and credit cards.