A student loan is a long-term commitment with the lender that can last up to five years after graduation. The interest rates and installments are significant enough to put stress on your finances. But many young graduates get a job with enough pay to manage the loan installments.
They face another major question of using the remaining amount for the proper purpose. Some suggest repaying the loan early to save money on the total interest. At the same time, others may suggest saving investing the money after paying the installment to grow the net worth. For some, it opens an opportunity to save for a house, car, or retirement fund from a young age.
It is confusing enough to decide because the options come with their pros and cons. Your financial condition will have an immense impact because of these decisions in the long run. Therefore, you must assess the different aspects of the available option before deciding the right way to use the additional income.
Early Repayment of Student Loan
The early repayment of a student loan means you will save money on interest. The term of the loan will decrease to reduce the stress on your finances. There is one less thing to worry about while trying to make a living during the financial troubles.
However, you should ask the lenders for the early repayment charges. There is no guarantee the faster repayment will save significant money if they bring the needless filing or other fees. Therefore, check whether the money directed toward student loans will have enough savings to be worth the trouble.
Furthermore, the early repayment will increase the amount of credit available for your profile. You will have better chances to get a loan in the future with affordable interest rates. However, you can get a debt consolidation loan to repay the high-interest loan early to focus on savings or investment.
Investing the Money
Investment is a great option if you want to grow your wealth. You may get more returns from your investment than savings from early repayment of the loan. Therefore, it makes more sense to use the money for growth instead of debt repayment.
However, there is no guarantee of returns when it comes to investment. You may even lose your savings in case of a market crash. Therefore, you must invest the money you can afford to lose.
Furthermore, the investment will require knowledge of the industry to avoid common mistakes. People trust the word of their brokers or the popular trend only to make disastrous decisions. Spend some time in the research to find whether the investment will return more money than the early repayment savings.
Saving for Financial Goals
You can also try to save money for your other financial goals to achieve them early in your career. It can include a house, car, or retirement funds. You would have savings to rely on during financial troubles if you chose goals over early repayment.
You can put the financial goals on hold if you encounter a financial problem during the repayment period. With the early start, you will still have time to achieve those goals before it’s too late. Make sure to prioritize those goals to avoid saving money for unessential ones.
The drawback of saving money for financial goals is the limited saving in the long term. Your savings will not grow in your bank account. At the same time, the other options will save money or increase your net worth with the same amount.
What Makes More Sense – Investment, Early Repayment, or Savings?
You should focus on the early repayment of the loan as the financial goals can wait. Investment is a tricky subject with no certain outcomes. You should not stop yourself from investing in a great opportunity.
Consider the possible returns from your investment and comparing them with the savings from early repayment. Furthermore, you should not back away from the business opportunities if you find a market-disrupting idea. It can help repay the loan within a year if you meet the customer requirements.
How to Invest with a Student Loan?
People often face difficulty while trying to create a strategy to manage the student loan with an investment. It is indeed difficult to secure your finances, pay the installments, and take the risk with investment. Nevertheless, the following tips will help if you have made your mind to invest while trying to repay a student loan.
Pay Minimum Requirement
You must make the minimum payment required for a student loan to avoid unnecessary damage to your credit score. It will create more stress on your finances with charges on late or missed payments. Therefore, start your budget by allocating the money for the student loan repayment before the investment.
Set Up An Emergency Fund
The emergency fund will save your financial condition from unexpected expenses. It is essential to living with a clear head to avoid a major crisis if somehow you lose the job or face an emergency. Your emergency fund should have enough money to manage the expenses for at least 3 to 6 months.
Find the Right Balance
The balance between your essentials, amenities, loan repayment, and investment is critical to living a comfortable life. You cannot afford to make heavy investments leaving any money for the essentials. Similarly, spending money on unnecessary expenses makes no sense while trying to live with a student loan and an investment profile.
Refinance the Student Loan
You should try to refinance the student loan to save money on the interest. It can help reduce the stress of repayment with reduced installments. Therefore, you will have more money to invest and improve your financial wellbeing.
To sum up, people should avoid investment and savings with student loans unless they have the right strategy. In most cases, you will find the returns from the alternatives less than the savings on early repayment of student loans. However, you should not ignore the great opportunities that may turn your life around.