Paying off your loan early can help you stay out of permanent debt.
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 a good deal of money that might have been wasted on interest.
Our guide will help you decide if prepaying your personal loan off early is the correct option for you.
Laurel Road Personal Loans
Get a personalized rate offer through a quick online application. Recommended for people with annual income of $60K+ and debt of less than 40% of their income.
- Min. Credit Score Required: 680
- Min. Loan Amount: $1,000
- Max. Loan Amount: $45,000
- Starting APR: 5.5%
- Loan Term: 3, 4 or 5 years
- Rate discounts for autopay
- No prepayment fees
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 for every month the balance is outstanding. 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.
Vincent compares his loan prepayment 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 payments.
Seven tips to pay off your personal loan faster
- Stash away the 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.
- Make larger payments when possible. If you get a raise or find yourself with more cash than you expected, consider putting it toward your loan.
- Look for discounts. Depending on your lender, you may be able to take advantage of discounts, even for something easy like enrolling in autopay or going paperless.
- Make more money without exhausting yourself. Sell your unwanted items through LetGo, 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 an additional payment. Sometimes you’re way under budget for the month. If you’ve already done some self-care, consider putting the rest toward an extra payment on 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 to lower your monthly payments.
- Make biweekly payments. If your payments are low and you can afford one every other week, why not invest in your loan and finish paying off what you owe earlier than scheduled?
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.
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.
Are there penalties for paying off your loan early?
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 one.
Since there are plenty of lenders that don’t have prepaying 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 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.
Three lenders that offer personal loans with no prepayment penalty
| Lender | Max. Loan Amount | Starting APR | Requirements | |
|---|---|---|---|---|
| Laurel Road Personal Loans | $45,000 | 5.5%–11.74% (fixed) | Must be a US citizen or permanent resident with a valid I-551 card. Best for people w/ 680+ credit scores and $60,000+ annual income. | Go to site More |
| Prosper | $35,000 | 5.99%–35.99% (fixed) | Must be 18+ years old, an American citizen or US permanent resident and have a 640+ credit score. | Go to site More |
| SoFi Personal Loan Fixed Rate (with Autopay) | $100,000 | 5.49%–14.24% (fixed) | You must be a US citizen or permanent resident, and 18 years or older. | Go to site More |
Once you’re done with this loan, consider your options
If you’re in the market for a new loan to cover the next big project in your life, we have a selection of lenders that suit every need.
Bottom line
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 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 at one time, you can follow some of tips above to pay it down faster. Review your options and find what’s best for your budget.
Frequently asked questions about prepayments
Before you visit Laurel Road…
The most qualified applicants have a minimum credit score of 680. Laurel Road tends to be best for people with annual income above $60,000 and total debt of less than 40% their income. If you don’t think Laurel Road is best for you, explore other loan options.
Before you visit Laurel Road…
The most qualified applicants have a minimum credit score of 680. Laurel Road tends to be best for people with annual income above $60,000 and total debt of less than 40% their income. If you don’t think Laurel Road is best for you, explore other loan options.
I have a best egg loan,want to know if I make extra payments,if it will go towards the principle…thanks
Hi Joe,
Thanks for getting in touch with finder.
Generally speaking, unless stipulated, when you make extra repayments to your loan, the majority of it goes to the interest and only a portion of the principal. There is a way to get around this. For example, you can pay your extra payments at the same time that you make your monthly payment. This way the money will go towards the principal.
Of course, let me be clear that every lender has their own way of handling debts. That’s why it is wise to read the terms and conditions of your loan or directly get in touch with your lender to see how you can pay off your debt sooner.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua