Should You Pay Off a Personal Loan Early?
A personal loan can help you meet a variety of financial goals. It may allow you to cover a medical bill or kitchen remodel. You may also use a personal loan to consolidate debt and save money on the payoff process.
When you take out a personal loan, you’ll need to pay it off by a certain term, which may range from a few months to several years. But what if you want to pay it off early to save on interest and gain some much needed peace of mind? Is doing so a good idea? Keep reading to find out.
What to Consider Before You Pay Off a Personal Loan Early
Before you go ahead and throw extra cash at your personal loan, be sure to keep the following in mind.
Some lenders will charge a prepayment penalty if you pay your loan off early. They do this so that they can collect as much money in interest as possible and steer you away from an early payoff. After all, lenders are just like most businesses and on a mission to maximize their profits.
Prepayment penalties vary from lender to lender. Many lenders, however, charge a small percentage of the remaining loan balance. Others will ask you to pay a fixed amount or a certain number of months interest.
If your lender does charge a prepayment penalty, you’ll need to do the math to determine whether paying off your loan early is worth it. In the event your interest savings will exceed the prepayment penalty fees, an early payoff may be the way to go.
On the contrary, if your prepayment penalty adds up to more than you’ll save on interest, you may want to keep your hard earned cash in your pocket and stick to your regular repayment schedule.
RELATED: What Is a Personal Loan Prepayment Penalty?
Other Financial Goals
Just because you have extra cash on hand doesn’t mean you should put it toward your personal loan. Think about your other financial goals and figure out which ones are most important to you. Maybe you don’t have an emergency fund and would like to save up three to six months of expenses. Or perhaps you have student loans with much higher interest rates that you’d like to tackle first.
Since money is a finite resource, it’s your job to allocate it wisely. If all your other goals are taken care of or getting rid of your personal loan debt is on the top of your priority list, go ahead and pay off your loan early. Otherwise, you may want to put other financial goals ahead of your personal loan payoff.
Where the Money Will Come From
In order to pay off a personal loan early, you’ll need to have extra cash at your disposal. Think about how you’ll get it. Did you earn a huge bonus at work? Will you need to work another job? Are you going to take money out of your retirement funds?
If you have to increase your work hours or pull from your 401(k) or Roth IRA, you may want to think twice before paying off your loan. Doing so may take a toll on your quality of life and/or hinder your retirement goals.
How to Pay Off Your Personal Loan Quickly
If you decide that paying off your personal loan early is a good choice for your unique situations, these tips are sure to help you out.
RELATED: Should You Take a Shorter Repayment Term with a Personal Loan?
Make Biweekly Payments
It’s highly likely that your lender requires you to make fixed monthly payments once a month. If you make biweekly payments, however, you’ll get out of debt sooner. In addition, you’ll be able to save some money on interest.
Apply Lump Sum Payments
If you receive a chunk of cash as a birthday gift, work bonus, or tax refund, you may want to apply your financial windfall to your personal loan. Lump sum payments throughout the year can really bring your loan balance down.
Refinance Your Loan
Refinancing may be the way to go if your personal loan has a high interest rate. This option can give you the chance to take out a new loan with a lower interest rate and more favorable terms. You may be able to refinance with your current lender or another lender with a more attractive offer.
Pick Up a Side Gig
If you’re serious about paying off your personal loan early but don’t have a lot of extra cash flow, pick up a temporary side gig. You can use your earnings from food delivery, ride-share driving, online tutoring, or another gig to make extra payments on your loan.
Weigh the Pros and Cons
At first glance, it may seem like paying off a personal loan is a no-brainer. After you dive deeper into the idea, however, you may realize it’s not the best choice. Before you embark on your journey to pay off your personal loan early, consider the pros and cons of doing so. This way you’ll be able to make an informed decision for your particular situation.