Paying off a personal loan early is possible — and often a smart financial move. When you pay off a personal loan early, you save money on interest and lighten your monthly budget ahead of schedule. Just be sure to check your loan terms for prepayment penalties.
“If you are in a financial position to pay off a loan early, it’s usually a good idea,” says Kyle Enright, president of lending at Achieve. “You’ll pay less interest, you’ll have one less monthly payment to make, and can hopefully funnel that money to savings.”
If you’re looking to accelerate paying off your personal loan, these four strategies can help.
[Read: Best Personal Loans.]
4 Ways to Pay Off a Personal Loan Faster
1. Add to Your Monthly Payment
Adding more to your regular monthly payment can help you repay your loan faster. It could be as easy as assigning yourself a higher monthly payment. For example, if your personal loan payment is $200, you could make $300 monthly payments. Or maybe you round up from $475 to $500. Even an extra $25 per month helps.
“You should be able to make principal-only payments in addition to your regularly scheduled payments,” says Rob Burnette, investment advisor representative and professional tax preparer at Outlook Financial Center. “That would reduce the number of payments remaining and lower the amount of interest you are paying.”
Pro
— Extra payments are easy to automate and lower interest over time.
Con
— Paying extra could stretch your monthly budget.
2. Apply Lump Sum Payments to Your Loan
Use tax refunds, side hustle income, bonuses or other windfalls to make large payments on your personal loan. You can significantly reduce your balance and shorten your loan term with large payments, even if you only do it once or twice during the life of the loan. You should contact the lender to ensure your lump sum payment is applied directly to the principal balance.
Pro
— You can quickly reduce your balance and don’t have to strain your budget.
Con
— Making occasional extra payments doesn’t provide consistent progress.
3. Use a Biweekly Payment Schedule
Instead of making a single monthly payment, divide your payment in half and pay that amount every two weeks. Making biweekly payments amounts to 26 half payments annually, or 13 full monthly payments. This gives you an extra payment each year without significantly straining the budget.
Pro
— Biweekly payments are predictable and may align with your paycheck.
Con
— You might have to work with your lender to schedule biweekly payments and confirm the extra payments go to the principal balance.
4. Refinance to a Better Rate or Shorter Term
Refinancing with a new loan pays off your existing personal loan. Ideally, your new loan will have a lower interest rate, shorter term or both. A refinance can help you save money on interest and reduce the length of your loan. Just make sure you factor in any origination fees or other loan costs to make sure you’re actually saving money.
Pro
— A refinance may help you save on interest charges and pay off your loan faster.
Con
— You may have to pay an origination fee, which could offset savings.
[Read: Best 0% APR Credit Cards.]
Is Interest Included When Paying Off a Loan Early?
Typically, you won’t pay all of the interest originally scheduled on your loan if you pay it off early. Personal loan interest is usually calculated daily or monthly on your remaining balance instead of up front, so you’ll pay less interest if you’ve lowered your balance ahead of schedule.
“If the loan allows prepayment, you can save on interest charges, less any potential prepayment penalties that may be included in the contract,” says Burnette.
Can You Pay Off a Loan Early Without Penalty?
You can usually pay off a personal loan early, but you might have to pay a fee. Though rare, some lenders charge prepayment penalties, which can be a flat fee or a portion of the remaining interest. The fee offsets some of the lender’s lost interest revenue.
“Check your loan agreement, or directly with your lender, to see if the lender imposes a prepayment penalty,” says Enright. “Every lender is different on its policy here. If there is a prepayment penalty, calculate the savings in interest in paying off the loan early versus the amount of the penalty.”
[Read: Best Low-Interest Personal Loans]
Will Paying Off a Personal Loan Early Help or Hurt My Credit Score?
Paying off a personal loan can lower your credit score if it’s your only active installment loan. For example, if you don’t have a mortgage, car loan, student loan or other personal loan, closing your personal loan account with a payoff could negatively affect your credit mix. However, paying off a personal loan could also help you qualify for more credit because it lowers your debt-to-income ratio.
Should I Pay Off My Personal Loan Early or Prioritize Other Financial Goals?
It can be a smart move to pay off a personal loan early, but it might make more sense to use the money elsewhere. If you have high-interest credit card debt, paying that off first might offer the most significant interest savings. You shouldn’t drain your emergency fund or skip retirement contributions to pay off a personal loan early.
“Make an honest assessment of your day-to-day finances,” says Enright. “If paying off the loan early will leave you bereft of savings, without an emergency fund or struggling to make ends meet, it may not be the best idea or the best timing.”
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4 Ways to Pay Off a Personal Loan Faster originally appeared on usnews.com
