Should You Pay Off Your Personal Loan Early?

There are many reasons people take out a personal loan, including vacation expenses, wedding expenses, home remodeling, and more.

Being stuck in debt is stressful, and the punishment for not paying the loan can take the form of a lawsuit, a deterioration in your credit score, or hefty fees for late payments. That’s why it’s important to do everything in your power to pay off your debt as soon as possible. You may have heard that paying off your debt as early as possible can help you save extra money in the long run, which is sometimes the case.

In general, the longer you are stuck paying off a debt, the more interest you will pay over the life of the loan. It is therefore advisable to pay off the loan early. However, before you finalize your payments a few months early, there are a few things you need to consider.

Is it possible?

Yes, it is possible to repay your loan early, which will help you reduce your repayment period by a few months. Note, however, that some lenders may charge a prepayment penalty for repaying the loan early.

This fee is either an amount showing how much the lender loses in interest if you prepay the loan, or calculated as a percentage of what you have left to pay on the personal loan. Also note that the calculation of the penalty varies from lender to lender.

Any penalties are also usually included in your loan agreement. If you decide to pay off your personal loan before the end of the loan term, call your lender or check your loan records to make sure you won’t be charged a prepayment penalty.

Will it affect your credit score?

When it comes to paying off your credit card debt, reduce the amount you owe relative to your credit limit. That means your credit utilization rate is lowered; How to improve your credit score.

However, personal loans do not work the same as they are installment debts. On the other hand, credit card balances are revolving debt, meaning you can borrow more cash up to your maximum credit limit as you make payments. Also, there is no fixed repayment period.

Note that if you have an installment debt, you must repay your debt in equal, regular amounts within a set repayment period. Once you have settled the debt, the account will be closed.

When you prepay a personal loan, your credit report will show a shorter account life. Remember that the longer your credit history, the better your credit score. With this in mind, prepaying a personal loan can lower your average credit score and credit history. A low credit score could make it difficult for you to find a job, good financial products, or a home.

In addition, if you pay off the debt early, you will lose the chance to make payments on time. Note that the more timely payments you make, the more it helps improve your credit score.

Things to keep an eye on

Here’s an overview of things to consider if you decide to pay off your personal loan early.

  • Monthly expenses. Before you decide to pay off your debts in advance, consider your monthly expenses first. There is no point in paying off the loan early if it gets in the way of making a living.
  • interest rate. Make sure you compare the interest rate on the loan you plan to pay off upfront against your other debt. In general, debt, like credit card balances, often comes with expensive installments. That means it makes more sense to pay them off first. By paying off the debt with the highest interest rate, you save more in interest charges in the long run.
  • Retirement provision. Retirement planning is vital, no matter how old you are. If possible, you should save money for your retirement and not withdraw money from this account. So don’t use your retirement money to pay off your personal loan early; This could lead to significant tax consequences.
  • emergency savings account. An emergency savings account is designed to help you pay for unexpected expenses like car problems or medical bills. Before you repay your loan early, you should consider setting up an emergency savings account.

bottom line

Is debt consolidation a good reason to get a personal loan or is an emergency a good reason to get a loan? Well, both reasons make sense for getting a personal loan. Personal loans can be an affordable and convenient way to pay off a large expense.

Additionally, if used responsibly, it can improve your credit history. However, it is best to consider whether your situation would allow you to take out a personal loan. Paying off the loan upfront can mean you’re likely to reverse the money you’ve saved on interest, pay a prepayment penalty, and hurt your credit score.

Michael created Your Money Geek to make personal finance fun. He has been in personal finance for over 20 years, helping families reduce taxes, increase income and save for retirement. Michael is passionate about personal finance, side hustles and all things geeky.


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