Paying your personal loan off early can offer some financial benefits. Depending on how your loan is structured, you could save a lot in interest costs, and freeing up the money you normally spend on the loan payment adds some cash back to your monthly budget.
But does paying off a loan early hurt your credit, and are there other downsides to doing so? Find out more about paying off a personal loan early below, including some tips for doing so while minimizing any potential disadvantages you might face.
Can You Pay Off a Personal Loan Early?
Yes, you’re allowed to pay off personal loans early. The better question is, “Should you pay off your personal loan early?” It’s important to weigh the pros and cons relevant to your specific situation before you pay off personal loans outside of the planned term.
To understand whether you should pay off a personal loan, first consider the general benefits and disadvantages that can apply.
| Potential Benefits of Paying Off a Personal Loan Early | Potential Disadvantages of Paying Off a Personal Loan Early |
| You might save interest.
You pay interest over the life of your loan, and paying down the principal of the loan faster than originally planned reduces how much you pay in interest. That’s because the interest is calculated on the principal amount, and if you pay some of that off early, the interest is calculated on a lesser amount. Depending on how your loan is structured and how fast you can pay it off, you might save hundreds or even thousands of dollars in interest payments. |
You might pay a penalty.
Some lenders build penalties into the loan structure that can lead to you paying fees if you try to pay the loan off early. They do this because if you pay the loan off early, you pay them less in interest. Interest is a primary way lenders make money, so some build other fees into the loan to ensure they get some money whether or not you pay off the loan early. |
| You free up money for the month.
Paying off your personal loan early leaves more money in your pocket every month. If, for example, your monthly payments are $200, that’s $200 a month you can start saving. You may be able to earn interest on that savings, and starting as early as possible by paying off your loan to free up the money can mean more savings down the road. |
You might reduce your credit mix.
One aspect of your credit score is your credit mix. Creditors like to see that you can handle a healthy mix of installment and revolving debt. If your personal loan is your only installment account and you pay it off early, the lender closes the account. That means you won’t have an open installment account listed on your credit report, reducing your credit mix. |
| You reduce your debt-to-income ratio.
Many lenders consider debt-to-income ratios when evaluating you for credit. This is especially true for larger loans such as mortgages or auto loans. Your debt-to-income ratio is how much in debt payments you have each month compared to your income. To get approved for a mortgage, your DTI must typically fall below a specific threshold, and paying off some of your debt early can help you get there. |
You may increase your credit utilization rate.
When your personal loan account is closed, that’s technically a line of credit removed from your credit report. This can increase your credit utilization rate, which might impact your credit score. |
| You don’t have to worry about the loan.
Life gets busy, and every financial detail you must attend to can add to your personal workload. Sometimes, reducing the number of bills you need to pay each month can help you streamline your money management for better outcomes. |
You might drop your overall credit age.
Another factor that makes up your credit score is how long you’ve had credit and, on average, how long you’ve had your various accounts. If your personal loan is one of the older accounts you have and you pay it off, you can drop your overall credit age. |
Whether or not you should pay off your personal loan early depends on how the considerations above relate to your current financial situation.
For example, if you’re just looking to save the interest cost, make sure you do some calculations. Start by figuring out exactly how much you might save. Then look at what it might cost to pay off the personal loan, including potential prepayment penalties and any impact to your credit. If you’re thinking about getting a new credit card or loan soon, will the potential hit to your credit result in a higher interest rate and more expense at that time? In this case, the disadvantages of paying off the personal loan early may outweigh the benefits.
On the other hand, if you’re preparing yourself to apply for a mortgage and need to lower your debt-to-income ratio, the benefits of paying off a personal loan early may outweigh the disadvantages. In the end, it’s a decision you must make for yourself after considering all the facts of your situation and loan.
5 Tips for Paying Off Your Personal Loan Early
If you decide that paying off your personal loan early makes sense for your situation, follow the steps below to increase your success in doing so.
1. Check for Prepayment Penalties on Your Personal Loan
Start by going through your loan paperwork to find out if there are any prepayment penalties. These are fees charged by lenders to help them recoup some of the money you would have paid in interest if you paid the loan off over the course of the entire term.
Note that not every personal loan has prepayment penalties. These fees must also be disclosed before you sign the loan and included in the written documentation about your loan. A lender can’t suddenly decide to charge these fees if you opt to pay off your loan and they haven’t previously disclosed them.
The existence of prepayment penalties doesn’t mean you shouldn’t pay off a loan early. However, it can change how much you have to pay to do so. You should also consider the total cost of those early payment penalties against the costs of paying your loan off over the entire term to understand which might be better for your finances in the long term.
2. Make Additional Payments Toward Your Principal
If you want to pay off a loan early and can drop the entire payoff amount in one go, that’s obviously the fastest way to go. But many people don’t have that kind of money to throw at a loan, so a more common way to pay off a loan early is to make extra payments on the principal balance.
You can do this by adding money to your loan payments or by making extra payments throughout the month. For example, if you’re supposed to pay $125 per month, you might pay $150 per month. The extra $25 can go toward paying down your principal faster. Alternatively, you might make two payments of $125 a month, with the second payment going entirely toward your principal balance.
When paying extra on a loan balance this way, it’s critical to pay attention to the details. Make sure it’s clear to your lender that you’re making extra payments on the principal of the loan. Otherwise, they may apply the extra payments toward your next month’s personal loan payment. While this helps you get ahead and pay the loan off faster, it may mean those extra payments are, in part, used to pay interest and not entirely put toward the principal balance.
Many lenders have options to ensure you can pay directly to the principal balance as long as you’re current with regular payments. If you mail a check to pay for your loan in response to a bill or with a ticket you tear out of a book, there’s usually an option on that piece of paper to indicate whether any extra you’re paying should go toward the principal. If you make your payments online and pay extra, most online payment processes ask if that extra should be applied toward your next payment or the principal of the loan.
Another important note is that if you do pay extra and ask for it to be applied to the principal balance, it does not count as getting ahead on your scheduled loan payments. You would still owe your next payment as agreed, and failing to make it could lead to late charges or other additional expenses.
3. Stick to a Budget
Paying off a personal loan early requires throwing more money at it than you might have planned. That might require finding some extra cash in your budget.
Look at your monthly expenses and compare that to your income to find extra money you can funnel toward your personal loan every month. You might do this by cutting out unnecessary expenses, such as eating out, or by increasing your income with a part-time job in the gig economy.
However you come up with the money to add extra payments to your loan every month, you only reach success if you stick with your plan. Track your income and expenses each month to ensure you’re sticking to the budget so you can pay off your loan early.
4. Refinance Your Personal Loan
In some cases, you might pay off your personal loan early without finding money in your budget. You do this by refinancing the loan, which means taking out a new loan to cover it.
Obviously, this tactic doesn’t leave you free of a personal loan payment. But it can reduce how much the loan costs you or how much you have to pay each month. That’s often the case when the original personal loan had extremely high interest rates or other poor terms. If you’ve improved your credit situation since you took out the first loan, you may be able to get a new loan with better rates and terms by refinancing, potentially saving yourself a lot of money in the long run.
5. Prepare for Loan Repayment With an Emergency Fund
Finally, avoid using your emergency fund or wiping out personal savings to pay off a personal loan early. While you might save yourself some money in the short term, what happens if an emergency comes up soon? You’re left without the cash to cover it, which could mean you have to turn to a high interest credit option. That can result in you spending more in the long run.
Will Paying Off Your Personal Loan Affect Your Credit Score?
Yes, paying off your personal loan early can have an effect on your credit score. Typically, the impact to your score is negative, in that your score might drop temporarily. That’s because, as noted in the table earlier in this article, paying off a loan early can result in:
- An increased credit utilization
- A lower credit age
- A less robust credit mix
It can be confusing because the opposite is actually true with a credit card. When you pay down a credit card balance, you decrease your credit utilization ratio. That’s because the account remains open, and you still have the line of credit associated with the card (as well as the credit age and mix).
The good news is that if you’re being responsible with your finances and actively working to improve your credit, any hit you take from paying off a personal loan early is likely to be temporary.
Frequently Asked Questions
How do I get fast money without a loan?
A job that you enjoy is one you should be able to earn a living doing. Part-time work may be necessary until you get enough experience.
Once you have gained some experience, you can look for a full-time position.
Freelancing could be done on sites such as odesk.com and elance.com.
How can I get instant cash?
You have two options to quickly make money, but they both come with risks. The first option is to sell items online, such as on eBay, Amazon, etc. These sites give you the opportunity to quickly make money selling products. This comes with many risks. You could lose a lot of money if you aren’t careful enough. If you don’t have the right knowledge, these opportunities might not be worth your time. There is also the possibility that the site you sold the product to goes bankrupt, and you could lose all your money.
Asking for help is the second option. This is usually done by asking family members and friends for assistance. You need to be careful. People will probably refuse to give you money if you ask them for it without giving anything back. In addition, if you ask for money when you’re already short of funds, you won’t earn any extra money either. Finally, if you find yourself in trouble again, you’ll still need to ask someone else for money.
Although these methods are possible to quickly make money, they seem risky.
How can I quickly borrow money?
We are a loan provider that helps people get loans for whatever reason they may need. We offer short-term, long-term and low-interest loans.
Since 2010, we have been serving this community and have earned our reputation as an honest lender.
We offer fair rates on all loans that we provide and ensure that you receive the loan you need.
Speedy Cash checks your credit?
Many lenders will require credit checks in order to protect you from being scammed or for people who may not be eligible for financing. But can they increase your chances in getting approved for loans?
The short answer is “Yes.” There is evidence that consumer reports helped millions of Americans get home loans by avoiding predatory lending practices.
Consumers need to know that these reports can have a significant cost, which can discourage borrowers from applying financially.
Apart from a lender reviewing your file, credit scores can also be affected. If you are late on your payments or miss several months, your credit score may drop. This is because missed payments are a sign of poor credit history.
You should be aware that not all lenders will review your credit report before authorizing you for a loan. Some will review your credit only once or twice while you apply for a loan, while others may not.
Make sure you fully understand the information being collected about you before you sign up for any type loan. Do you wish to reveal any private information about your finances?
What Is a Payday Loan?
A payday loan, which is a short-term loan that can be taken against future paychecks, is the most commonly used type of loan. These loans often have higher interest rate than personal loans.
The borrower must repay the money within two weeks of receiving his next paycheck. If he fails to do this, he may lose all or part of the amount borrowed.
Payday lenders often charge high fees for these short-term loans. They also tend to target people who already face financial difficulties. They are an easy way for borrowers fall in debt.
Does Cash App let you borrow money?
Yes! The app can be used to lend money from friends and family. And if they don’t have enough cash, you can pay them back using your funds.
The best thing? The best part? It’s completely free! There are no fees to borrow or repay. However, this feature is only available to those who have an active bank account.
Can I get an internet loan without a credit check?
Yes, the answer is yes to that question! Here are 6 methods to get an internet loan without a credit check.
- CashNetUSA.com offers an easy online payday loan application. Simply approve and pay.
- LendingClub.com allows you to apply online for a personal loan.
- Prosper.com has an online installment loans available – 0% Intro AP Rate for balance transfers and purchases after 60 days
- AutoTitleLoans.net allows you to apply online for a auto title loan – get approved in less than 24 hours. Within 2 hours you can receive money.
- LendUp.com enables you to apply online for a bank loan – Receive cash in your account within 24hrs
- BizLineLoan.com has over $100 Million in financing options.
Statistics
- For example, CashUSA’s payday loan APRs range from 5.99% to 35.99%, placing them well within the averages for most major lines of credit, including credit cards and bank loans. (timesunion.com)
- Those protections include a cap of 36 percent on the Military Annual Percentage Rate (MAPR) and other limitations on what lenders can charge for payday and other consumer loans. (consumerfinance.gov)
- Cons Up to 8% origination fee (abcactionnews.com)
- Upgrade The company offers a 3 percent cash back on Auto, Health, and Home categories and a 1 percent cash back on the rest. (abcactionnews.com)
- If you’re preparing your bank account for the charges that WeLoans will cost to find a lender, put that thought aside because it’s 100% free. (abcactionnews.com)
External Links
consumer.ftc.gov
sfgate.com
How To
How to get Car Title Loan
A car title loans is a service that allows those who need cash fast to borrow against the security of their vehicle. This involves someone from a lending company coming to borrower’s home with a completed application form and proof of ownership. Once these documents have been verified, a cash advance can be taken, typically from $500 up to $3500 (although this varies depending on state laws). The funds are then directly deposited into the borrower’s account without any fees.
Here are some of the benefits associated with car-title loans:
- Quick Cash Advance: Lenders require that borrowers repay the loan within seven days. This allows you to quickly access the funds you need, without having to wait for approval from your bank.
- No collateral is required in order to be eligible for a car-title loan. A majority of lenders won’t accept checks or credit cards so you don’t have to worry about your check getting bounced or your card being declined.
- Easy Application Process: Online applications are often easier than filling out forms and waiting to be approved by lenders.
- Low-Interest Rates: Car title loan providers often offer low rates and even free interest.
