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Is paying off debt early always the best decision?

Every single person who has ever logged onto the internet to pay their student loans, glanced at their mortgage statement or written a check to cover their car payment has at some point fantasized about what it would feel like to have these debts completely paid off.

While it's true that paying off -- or even just paying down -- one of these financial obligations would not only free up money for other expenses and even grant peace of mind, some experts indicate that people who find themselves in this unique position may want to proceed with some degree of caution.

That's because they argue that there can be certain unforeseen consequences to paying off debt early.  

If this understandably sounds hard to believe, consider the following points:

  • Paying off debt too quickly, particularly if you are young, can jeopardize your opportunity to build your credit history via a record of timely payments.
  • Using a sizeable influx of money (raise, bonus, inheritance, etc.) to pay off a debt can deprive yourself of a comfortable cash buffer to cover real world expenses and, by extension, increase your reliance on borrowing and credit, which typically have higher interest rates.
  • Using a sizeable influx of money to pay off a debt can deprive yourself of investment opportunities that would yield more money over the long term.
  • Owing certain debts -- mortgage, student loans, etc. -- can mean more tax deductions.

Above all else, experts urge people to consider these points if they find themselves in this position and to also remember that it's perfectly acceptable from a financial perspective to pay off obligations like mortgages, student loans and car payments over a long time given their typically fixed low interest rates.

At the other end of this spectrum, it's important for those people for whom paying down debt is not an option and who are actually struggling to make minimum payments to understand that they do have viable options for securing a fresh start.

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