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Can You Pay off Personal Loans Early?
Paying off a personal loan early is possible, but there are a number of positive and negative factors to consider when considering whether or not to pay off your personal loan early.
There are a number of tactics that you could use if you are interested in paying off your personal loans early, like making higher or extra payments, earning extra money, looking into balance transfers, and changing your lifestyle habits.
If this is something you are seriously considering, read up on your loan terms, weight the advantages and disadvantages, and make a plan to pay off your personal loan.
7 Ways To Pay Off A Personal Loan Faster
Paying off your personal faster is easier than you think, as long as you're committed to your plan. Discipline is a must, but may be difficult due to financial circumstances.
Here are the best ways to pay off faster:
1. Make Higher Payments
All personal loans are paid at a set monthly payment. By paying more than the minimum monthly payment, you will be able to pay off the loans much faster.
The only drawback of this option is that you will have less money to work within your budget.
As an example, let's take a $20K loan for 5 years and 12% interest:
How Much You Save
2. Make Extra Payments
One great tactic to pay off your personal loan quickly is to pay the bill more than once a month.
By paying more than once a month, your balance will lower quickly, making it easier for you to pay off the loan before adding more interest. When you make a monthly payment, a portion of it goes towards the principal (the amount borrowed), while another portion goes towards interest.
However, depending on the loan company, you are paying only the principal if you pay extra monthly.
Here's an example of how much you can save with another extra payment every year. The payment will be made on the month after the loan has been taken every year:
Extra Yearly Payment
How Much You Save
3. Contribute Your Annual Bonus
When you earn a large lump sum of money from things like yearly bonuses or your tax return for example, it may be tempting to just spend it on something you want like a vacation or a new TV.
However, that money may be better spent by putting it onto your personal loan. In the long run this will save you a lot of money by making it easier for you to pay it off quicker.
4. Find New Ways To Make Money
In order to put even more money down on personal loans, it may be a good idea to earn extra money on the side.
For example, websites like Upwork offer people an opportunity to freelance their skills to make extra money outside their regular job. Instead of using that money, simply put it all on a personal loan; you will be surprised to see how much this makes an impact!
If freelancing isn’t for you, you could pick up extra shifts at your job or drive for Uber.
Of course, this may be a drawback as it could raise you to a higher tax bracket, meaning the money you earn may be taxed at a higher rate, so it is definitely something to look into before securing more hours or getting another job.
5. Save More
One way to help pay off your personal loan is to save money in other areas of your life and use that money to put it towards the personal loan.
For example, to save money would be cutting cable cords. A majority of apps in today’s market offer subscriptions to get all of the channels you normally watch on cable, for a fraction of the price.
Speaking of subscriptions, it may be a good idea to take a look at the subscriptions you have. There may be a number of subscriptions that you are paying on but not even using, which is a waste of money
6. Use Balance Transfers
This tactic is a way to take advantage of lower introductory rates.
A personal loan can be moved to a balance transfer card. Make sure you read the terms of a balance transfer card before applying because some card issuers do not permit balance transfers from personal loans.
Of course, this won’t get rid of your debt, but it may help lower your monthly payments, making it easier for you to make extra payments.
In case you consider it, compare 0% intro APR cards and make sure to focus on more factors besides the 0% intro period.
7. Change Spending Habits
The best way to overcome debt and pay off a personal loan faster is to change your lifestyle habits. This may include eating out, going to the movies, concert tickets, or any unnecessary bills.
By lowering these bills, or eliminating them altogether, you are able to save money to put towards your personal loans.
How Much Can I Save By Paying Faster?
For those who are looking to see how much they are able to save by paying off a personal loan early, here are some examples to refer to.
An initial $20,000 loan for 5 years with 12% interest would total $26,693 if paid off in five years – if paid off in three years, you will end up paying $23,914, a savings of almost $2,800. If it is paid off in two years, you would pay $22,595, an even bigger savings of $4,098.
How Much You Save
An initial $10,000 loan for 5 years with 15% interest rate would total $14,274 if paid off over the full term of the loan – if paid off in three years, it would total $12,480, a savings of $1,794. If paid off in two years, you would pay $11,637, a savings of $2,637.
How Much You Save
Is There A Penalty For Pay Off A Personal Loan Early?
In general, it is often best to pay off the loan quicker than the full life of the loan to save on the interest.
However, depending on the loan terms and the company, there may be a penalty associated with paying off the loan early.
- Prepayment Penalty – some companies will charge a fee for paying off a personal loan early, which is typically calculated as a percentage of the loan balance. Each company is different, but the prepayment penalties will be outlined in your loan agreement.
- No Penalty – there are a number of companies that will not charge a penalty for paying off a loan early. SoFi, Lending Club, and Marcus by Goldman Sachs are a few examples.
Does Paying Off A Personal Loan Early Hurt Credit?
While it may be tempting to have the loan paid off early to avoid the high-interest payments, there is a small drawback that you must consider – your credit score can suffer a bit if you pay.
Since credit agencies look at credit mix, payment history, and credit utilization, the elimination of a loan by paying it early may hurt your credit score. Anyway, even if it happens – the impact should be minor.
There are a number of disadvantages that are associated with paying off a personal loan early.
First of all, as previously mentioned, it may lower your credit score as you are eliminating debt.
Furthermore, depending on the company, there may be a penalty for paying off the loan early so the company is able to earn the most amount of money.
Another disadvantage is that it will limit the amount of money you are able to use within your budget, which could be a disadvantage if you come into money problems.
The obvious advantage of paying off a personal loan early is that you are avoiding the interest added to the loan payment. As shown in the examples provided, you could save thousands of dollars by paying it off early.
Another advantage is that you will lower your debt to income ratio, which will help you obtain more favorable loan terms in the future.
Furthermore, you will have more money in your monthly budget once the loan is paid off. Finally, you will gain a peace of mind knowing you won’t have to owe anybody else money, and that you are free of debt.
It is possible to pay off a loan with another loan, but you must be sure to read the fine print in the contract first to ensure you are able to do so.
If this is your plan, it is best to speak with a credit counselor to help create a debt consolidation plan.
A debt avalanche is taking a look at your debt, identifying the loans with the highest interest, and paying off that loan first.
This does not mean you simply forget about your other debts, you just pay the minimum on those loans in the meantime.
The debt snowball is taking your smallest debt, and paying it off immediately. Once you pay off the smallest loan, you then direct your attention to the next smallest loan, working your way up to the largest personal loan you have.
This method offers many advantages and disadvantages, but it is a great way to keep a person motivated when paying down on their debt.
Once a loan is paid off, you will not have to worry about the monthly payment in your budget. It will also be taken into account for your credit report and your debt-to income ratio.