When you start digging into the world of debt, it seems like a no-brainer: If you have debt, you should pay it off early. But should you pay off all debt early?
We are a nation in debt, with data indicating that outstanding consumer debt, as of July 2014, was $3.24 trillion. The revolving debt (mostly credit cards) in the United States is at $847 billion. This, Nasdaq.com points out, is the combined GDP of Denmark and Belgium. And that’s just revolving credit and consumer credit. Those numbers don’t even include mortgage debt, which sits at $8.07 trillion as of September 2014.
The solution seems to be to pay down that debt as soon as possible. After all, if you are paying interest to someone else, you’re lining their pockets, and not your own. But does it always make sense to pay off all debt early? Should you rush to pay off that 30-year mortgage in 10 years, or pay off that five-year auto loan in three years?
Surprisingly, you might be better off keeping some types of debt to term.
Low interest and tax-deductible
“Generally, you shouldn’t attempt to pay down debt at an accelerated rate if the loan interest is tax-deductible, and if the rate is low,” says Greg Lessard, a retirement planning counselor and president of Aspen Leaf Partners. Lessard also suggests that if you have a low debt-to-income ratio it might not be worth it to speed up your debt repayment and pay off all debt.
He points out that for most consumers, home mortgage interest and student loan interest is tax-deductible. As a result, if you could put your resources into an asset that offers you a higher return, you are better off investing the money than putting it toward accelerated debt pay down to pay off all debt early.