When is it worthwhile to pay off a loan?

We usually see debt as something negative, and having loans can keep us up at night. For this reason, many people decide to pay off their loans early to get "debt-free." But is it always worthwhile to do so? In our country, most loans use the French amortization system. This means that each payment covers a portion of the principal and a portion of the interest. Contrary to what many believe, the interest isn't always the same amount: it's calculated based on the outstanding balance. Thus, at the beginning of the loan, we pay significantly more interest than at the end. For example, on a €50,000 loan to be repaid over 60 months with an APR of 5%, the monthly payments would be €941. In the first payment, we would repay €737 of the principal and €203 of interest. However, in the final payment, we would repay €937 of the loan, and only €4 would be interest. Therefore, in the French system, interest rates decrease as the loan term progresses. This means that it's usually not advantageous to pay off a loan towards the end of its life, since most of the interest has already been paid, and therefore, we could say that the remaining money is "almost free."

The loan terms must also be considered. As we've discussed in other articles, it's generally not profitable to prepay a mortgage, especially if it has a low interest rate. However, it can be beneficial to do so with personal, car, or consumer loans, which tend to have higher interest rates and, therefore, offer greater potential savings. The important thing is to carefully analyze your financial situation and make the decision based on sound judgment, not just on the feeling of relief that comes with "not owing anything."