Editor's choice: Upstart personal loans
- Work and education get you better rates
- Fair credit OK
- No prepayment penalty
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By choosing to pay off your loan early, you can often save a good chunk of money that would’ve been wasted on interest. However, some lenders charge steep prepayment penalties that may make early payoff an expensive prospect.
There are several benefits to paying off your personal loan early:
Choosing to pay your loan early will result in paying less interest over the life of the loan, but you may face steep prepayment penalties or exit fees if you aren’t careful when picking your loan terms.
Paying these charges may be worth it if your monthly payments 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.
8.05% to 35.89% fixed
US citizen or permanent resident, verifiable bank account, steady source of income, ages 18+.
5.99% to 18.72% (fixed)
Ages 18+, US citizen or permanent resident
7.95% to 35.99% (fixed)
Must be 18+ years old, an American citizen or US permanent resident and have a 640+ credit score, not a resident of Iowa or West Virginia.
Personal loan payments can hang like a weight over your head. Choosing to tackle repayments head-on can save you time, money and stress — without having to sacrifice a huge part of your monthly income.
Before you start applying any of these tips, make sure your lender allows you to make extra payments without additional charges and that you have enough extra income to cover what you’re spending.
It depends. Some lenders will penalize you for paying off your loan early as a way to make back a portion of the interest you would have paid if your loan had gone to term.
Prepayment 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 these.
Typically, a prepayment penalty is a percentage of the loan balance you’re paying off. So the sooner you pay off your loan early, the larger the penalty you pay. Lenders apply this so they don’t lose on the lost interest payments.
Since there are plenty of lenders that don’t have prepayment penalties, it’s in your best interest to also research ones that don’t precompute your interest. Also known as add-on interest, this is where lenders calculate the amount of interest you’ll pay over the life of your loan and add it to the principal.
It might seem convenient, but it will cost you more if you decide to pay your loan 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.
Paying off your debt could remove a weight from your shoulders, but it might not be the best choice. There are times when sticking it through to the end is beneficial.
It might. 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.
However, closing an account is inevitable. You won’t be paying off your loan forever, so consider what other accounts you have open. Make sure you have a healthy mix of open accounts and long payment history to offset the closure of your current personal loan.
Vincent 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.
Vincent decides 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 opens up his finances so he can start investing the money he was previously spending on payments.
If you’re in the market for a new loan to cover the next big project in your life, here’s a selection of lenders that may suit your needs.
Making early prepayments 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 prepayment to clear your outstanding balance all at once, there are small steps you can take to pay it down faster.
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