You can pay off a personal loan faster by putting a lump sum of extra money toward the principal, paying extra each month, or making biweekly payments instead of monthly payments, among other strategies. Paying off debt like personal loans is generally considered a good financial move, although in some cases it may be better to use the extra money in other ways.
Key Takeaways
- One way to pay off a personal loan faster is to put a lump sum of money, such as a gift you receive, toward the loan balance.
- If you make biweekly payments instead of monthly payments, you will make one extra payment per year and pay your personal loan off faster.
- To pay down a personal loan faster, you can pay more than the minimum payment each month.
- Paying off a personal loan early comes with financial benefits like saving money on interest and getting out of debt faster.
Is It a Good Idea to Pay Off Your Personal Loan Early?
Paying off a personal loan early is a good idea in many situations, but it does have some potential downsides to consider.
Paying off a personal loan may not be a good idea if you have any higher interest debt because paying that debt can save you more in total interest. For example, you may want to pay down credit card debt as quickly as you can, as credit cards tend to have high interest rates that can compound and put you in more debt.
According to the Federal Reserve, in August of 2023, the average interest rate for a 24-month personal loan was 12.48% versus 21.19% for a credit card.
However, if you have a personal loan with a higher interest rate than your other debt, it may be a good idea to pay it down early to help you save money on interest and reduce your debt load. This can improve your credit score and help you free up cash in your budget.
Mortgages tend to have lower interest rates, so you may find paying off a personal loan instead of a mortgage early can have greater returns. Auto debt and student loan debt also usually come with lower rates than personal loans.
Before you pay off a personal loan early, however, you should consider the financial consequences of doing so. For example, you may have to reduce your spending to pay extra toward the principal each month. Make sure extra loan payments will work with your budget. You'll also want to know about any prepayment penalties that can apply and whether your interest savings will offset them.
4 Ways to Pay Off Your Personal Loan Faster
You can take specific steps to pay off a high-interest loan quickly to save money on interest. Here are some strategies:
Make Biweekly Payments
First, you can consider making biweekly payments toward the loan balance instead of monthly payments. This strategy can help you cut months off your loan's repayment term, and you may not feel the impact if you are paid every two weeks.
For example, let's say you have a personal loan with a $200 monthly payment, and you decide to make biweekly payments of $100 instead of paying monthly. If you did this, you would wind up paying $2,600 toward the loan over the year (with 26 biweekly payments over 52 weeks) instead of the $2,400 you would pay over 12 months.
Make Extra Payments When You Can
You can also get out of debt faster by making extra payments, even if said payments are irregular. For example, you can put any gift money you receive toward a personal loan balance throughout the year, or you could make extra payments when you earn more than you expected.
If you use an online loan calculator, you can see how changing the payment amount will help you pay off a loan faster and save you money. For example, using Investopedia's online calculator, you can see that if you borrow $5,000 with an interest rate of 10% and a 5-year term, you would owe $106.24 per month for five years and pay a total of $1,374 in interest. If you put an extra $25 per month toward the loan, you could pay it off 1.2 years sooner and save $333 in interest payments.
Use a Monthly Budget
Look for ways to cut spending so you can pay more toward your loan. Reviewing your budget can help you figure out where extra cash is going and which expenses are not necessary. Cutting those from your spending can free up more money to use toward personal loan payments to pay off your personal loan faster.
You can also try a budgeting app to help you develop a strategy for saving and spending that will allow you to put more toward your loan.
Some of the best budgeting apps include Mint, You Need a Budget (YNAB), and PocketGuard.
Refinance Your Loan
Finally, consider refinancing your personal loan, but only if you can get a lower interest rate than you have now. If you refinance at a higher rate or extend your repayment plan to get a lower monthly payment, you could easily wind up paying more in interest and for longer than you need to.
While interest rates for personal loans are higher now than they were a few years ago, you could potentially still qualify for a lower rate now if your credit score has improved, your debt is lower, or your income is higher.
Calculate how much refinancing a personal loan would save you in interest and how much faster you could pay it off. If you had a $10,000 personal loan with an 11% interest rate and a 60-month repayment term, you would pay $217.42 per month and $3,045.45 in interest in total. If you qualified for a lower rate of 7%, however, you could make a slightly higher monthly payment of $239.46 for 48 months (four years), cut a full year from the loan term, and pay just $1,494.20 (about half) in total interest charges over that time.
Pros and Cons of Paying Off Your Loan Early
Paying off a personal loan early has significant benefits in interest savings, but there are still some downsides.
Pros
Get out of debt faster
Pay less in interest
Reduce financial stress
Cons
Opportunity cost
Prepayment penalties are possible
Temporary impact on credit score
Pros explained
- Get out of debt faster: Making extra loan payments can shorten your loan's repayment term, saving you months or even years of loan payments.
- Pay less in interest: Extra payments also reduce the principal balance of the loan, which means less interest is charged on the loan in subsequent months.
- Reduce financial stress: Getting out of debt faster and saving on interest can give you peace of mind and make it easier to keep up with other expenses and bills.
Cons explained
- Opportunity cost: If you throw all your disposable income toward extra loan payments, you could miss out on savings and investment opportunities or have a lower quality of life.
- Prepayment penalties are possible: Some loans charge prepayment penalties, although fees for early payments are relatively rare. Either way, you'll want to read over loan paperwork to check for prepayment penalties before you make extra payments.
- Temporary impact on credit score: Paying off a loan can temporarily ding your credit score in a few different ways, including removing this debt from your credit mix, which is a factor that makes up 10% of your FICO score. Paying off a loan can also shorten the average length of your credit history, which makes up 15% of FICO scores. However, these factors are generally minimal compared to the positive impact of reducing your debt.
What Is the Typical Penalty for Paying Off a Personal Loan Early?
While prepayment penalties on personal loans are relatively rare, some lenders may charge fees for early payoffs. Lenders may charge a flat amount, a specific time period's worth of interest, or a percentage of the remaining loan balance.
Will Paying Off a Loan Hurt My Credit Score?
Paying off a loan can potentially have a small negative effect on your credit score in the short term, since it can remove a loan type from your credit mix and could shorten the average length of your credit history. However, loans that are paid off and closed in good standing remain on your credit reports for 10 years, and the benefits of getting out of debt early can be well worth any temporary impact on your credit.
Can you Take Out a Loan and Pay It Back Immediately?
You can take out a loan and pay it back immediately, but you can still incur costs. For example, many personal loans charge upfront origination fees that are automatically deducted from the loan proceeds. There are also potential prepayment penalties.
Can I Lower My Monthly Personal Loan Payment?
You can lower a monthly personal loan payment if you qualify for a lower interest rate or you choose a longer repayment term. However, choosing a longer repayment term without a lower interest rate can cost you significantly more interest over time.
Is It Better to Pay a Personal Loan Weekly or Monthly?
Making a payment toward a loan more than once per month can help you pay down debt faster and reduce interest payments. However, the best payment frequency for your needs depends on your budget and what you're trying to achieve.
The Bottom Line
There are advantages and disadvantages that come with paying off a personal loan early, yet the pros almost always outweigh the cons. After all, getting out of debt has major upsides outside of interest savings and fewer payments to make each month. Becoming debt-free can make life easier and less stressful, and it can help free up money for other financial goals.
