Nearly everyone has to take out a loan at some point in their life, and that means nearly everyone needs to pay off that debt. By choosing to pay off your debt early, you can save yourself plenty of money that would have otherwise been wasted on interest payments.
Our guide will help you decide if repaying your personal loan early is the right option for you.
What are the benefits of paying off a personal loan early?
Beyond no longer having to budget for monthly payments, paying your loan off early will save you hundreds, sometimes thousands, of dollars in interest over the long run.
Like all forms of credit, personal loans accrue interest each month the balance is outstanding. Choosing to pay your loan off early will result in paying less interest over the life of the loan, but you may face steep early repayment penalties or exit fees if you aren’t careful when picking your loan terms.
Paying these charges may be worth it if your monthly repayments are high and you can afford to pay the whole balance back at once. If you can’t, there are steps you can take to reduce the total amount you owe.
8 tips to pay off a personal loan faster
Stash away your change. Find an app that allows you to round up the change from your purchases and put it toward savings. Once you’ve built up some capital, you can make an extra payment toward your loan.
Pay every 2 weeks. Making bi-weekly payments might feel like you’re paying twice a month, but in reality its a little more than that. You could end up paying off your loan earlier without even realizing it.
Round it up. Round up your payments to the nearest $50 or even $100 to pay off more of your loan amount.
Look for discounts. Depending on your lender, you may be able to take advantage of discounts, even for something easy like setting up automatic payments or going paperless.
Make more money without exhausting yourself. Sell your unwanted items through sites like Kijiji, eBay or even your local consignment shop. This can be a great way to make a little cash to put toward your loan.
Squeeze in 1 big extra payment. If you get a raise or find yourself with more cash than you expected, consider putting it toward your loan.
Refinance your loan. Has your credit score improved? Are you stuck with an interest rate that’s much higher than it should be? Consider refinancing your loan to get a better interest rate and lower your monthly payments.
Cut expenses. Look at your monthly budget and find areas to cut back. Cutting things like your cable TV subscription can save you a large pile of money each month, and with streaming services you probably won’t even miss it.
Lenders that offer personal loans with no prepayment penalty
Be sure to select “Compare” in the table below per lender to see if you meet the minimum requirements.
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Are there penalties for paying off my loan early?
It depends. Some lenders will penalize you for paying off your loan early as a way for them to make back a portion of the interest you would have paid if your loan had gone to term. Early repayment penalties or exit fees are usually included in the loan contract before you sign, so if you know you’re going to be paying early, avoid lenders that charge one.
Since there are plenty of lenders that don’t charge early repayment penalties, it’s in your best interest to also research ones that don’t precompute your interest. This is where lenders calculate the amount of interest you’ll pay over the life of your loan and add it on to the principal. It may seem convenient, but it will cost you more if you decide to pay your loan off early. An interest refund will be given to you, although this still won’t be as cheap as finding a loan that accrues interest daily rather than including it all as one lump sum.
Will paying off a loan early hurt my credit score?
Possibly. Once you pay off your personal loan, it will be considered a closed account on your credit report. If closing that account reduces the diversity of your credit portfolio or shortens your payment history, you may end up hurting your credit score even though you’re saving money on interest and paying off your debts.
However, closing an account is inevitable. You won’t be paying your loan off forever, so consider what other accounts you have open and make sure you have a healthy mix of open credit and a long payment history to offset the closure of your current personal loan.
Example: Vincent compares his loan repayment options
Vincent has recently inherited a large sum of money and wants to pay off a few loans he’s taken out over the years, but he isn’t sure if paying them early will be worth the expense. He creates a small chart to compare his outstanding loans and calculate the interest he’ll save.
Amount borrowed
Term
Interest rate
Monthly payment
Months left on term
Lump sum payment to pay off loan
Amount saved on interest
Loan 1
$35,000
5 years
8.99%
$726.37
12
$8,306.45
$410.02
Loan 2
$10,000
3 years
12.99%
$336.89
10
$3,176.73
$192.19
Loan 3
$50,000
7 years
10.9%
$853.50
18
$14,113.82
$1,249.09
Vincent decides that it would be worth it to pay his first and last loan off early, but that he wouldn’t benefit from paying off the second since the amount he would save is so low. This takes a huge weight off his shoulders and opens up his finances so he can start investing the money he was previously spending on loan repayments.
Bottom line
Making early repayments on your loan can save you hundreds or even thousands of dollars in interest. There’s the risk of fees, but these can be avoided by comparing your loan options before you borrow.
While you may not be able to make a huge early repayment to clear your outstanding balance at one time, you can follow some of our tips above to pay down your balances faster. Review your options and find what’s best for your budget and financial situation.
This will depend on the lender. Only some lenders that offer no early repayment penalties will allow you to make more than one payment per month.
Early repayment fee costs vary among lenders. It could be a fixed fee, a percentage of the remaining interest on the loan or a combination of both. You’ll want to talk with your loan provider to find out what you’d have to pay.
You should be able to find information about your loan in your online account portal or in your loan contract. If there’s a specific piece of information you can’t find, contact the lender’s customer service team.
Leanne Escobal is a publisher for Finder. She has over 11 years of experience in financial services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University.
Learn about the differences between personal loans and lines of credit to decide which one suits your borrowing needs.
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