How To Pay Off a Personal Loan Faster

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You can pay a personal loan off early, and doing so has its benefits, including saving money on interest. However, you may face a prepayment penalty, depending on the fine print of your loan and an early payoff can temporarily affect your credit.

Take a look at some of the pros and cons of an early loan payoff and learn how to pay off a personal loan faster.  

5 Best Strategies to Pay Off a Personal Loan Quicker 

Consider the following strategies if you’re looking to pay a personal loan off faster.

1. Make Biweekly Payments

This is a popular strategy, and it involves splitting your monthly loan payment into two half-payments every two weeks. It usually allows less interest to accrue and results in one extra full payment per year, helping you get out of debt faster. 

2. Round Up Monthly Payments

Add a small amount to each monthly payment by rounding up to the nearest hundred dollars. 

Say you’re making a $250 monthly payment on a $10,000 loan at an 11.66% interest rate — that’s the current average rate on a personal loan, according to the Federal Reserve. You’d pay back the loan, along with $2,723 in interest, over 51 months. 

However, if you add an extra $50 to each monthly payment, you’d pay off the loan in 41 months, resulting in a total interest cost of $2,143.

3. Make Extra Payments

If you can’t or don’t want to commit to a more aggressive payment schedule, you can simply make extra payments as you can afford them. Even a little extra can go a long way.

Consider dividing your monthly balance by 12 and spreading that cost across all your payments that year as a starting point.

4. Use Windfalls

Put unexpected financial gains toward your loan’s principal. What’s a windfall? That could be your tax refund, annual or quarterly work bonuses, prize or gift monies, an inheritance or investment profits. 

5. Refinance to a Shorter Term 

Refinancing can help you get rid of the debt more quickly. However, your monthly payment is likely to increase.

Plus, while short-term loans often have lower annual percentage rates (APRs) than long-term loans, there’s no guarantee you might not qualify for a similar or lower one. 

Check for Prepayment Penalties

Some lenders charge a prepayment penalty on a personal loan if you pay back the funds before the term officially ends. These prepayment penalties enable the lender to recoup lost interest.

They can be either:

• Flat fee
• Interest-based
• A percentage of the remaining balance, typically ranging between 1% to 5%

As a result, consider these penalties before initiating an early payoff. Lenders have to disclose prepayment penalties, so review your loan agreement to see if and what you might owe.

Look for terms like these when reviewing the terms and conditions:

• Prepayment fee
• Prepayment penalty
• Early payment fee
• Early payoff clause

Keep in Mind

Prepayment penalties can take a chunk away from your savings. For instance, if you want to pay off the remaining $10,000 on a loan with a 3% prepayment fee, you’d pay an extra $300 and a total of $10,300 to do so. You can also call your lender to clarify its policies. 

How To Automate Your Payoff Plan 

You can reduce the legwork associated with paying a loan off early by taking the following steps:

• Set up biweekly auto-payments. Some lenders allow you to do this through their app or your online account.
• Increase the fixed amount on each scheduled payment if you’ve decided to pay more than the minimum each month. Some lenders don’t allow this, but instead allow for additional payments manually to pay off your loan faster.
• Request principal-only payments. The lender might apply extra payments to future interest, negating some of the benefits of an early payoff. Not all lenders offer principal-only payments, though, and even those that do may require you to notify them each time you want to make one.
• Use a budgeting or payoff tracker app. Apps such as YNAB often have extra autopay features, budgeting tools and payment plan recommendations that can help you with an early loan payoff. They may charge a subscription fee, though.

How Do Early Payments Reduce Interest? 

Personal loans are installment loans that carry fixed APRs. Each monthly loan payment includes an equal portion of the loan’s principal — its balance and interest.  

Pay Down the Principal

Personal loan interest, however, accrues only on your remaining balance, so if you pay off more principal more quickly, you’ll reduce the amount of interest that accrues over the life of the loan and save yourself some money.

Remember, you’ll only save on interest if the lender applies your extra payments to the loan’s principal. So, first, make sure they allow principal-only payments.

Automate Payments

Check to see whether you can automate these payments or if you’re required to notify the lender how you’d like the extra funds applied each time. This puts your payoff plan on autopilot.

Should You Pay Off a Loan Early or Invest That Money? 

You’ll need to compare your loan’s APR against your potential investment returns to determine the best use of your money. 

Generally speaking, you’ll want to prioritize paying high-interest debts, typically those carrying an APR of 8% or higher, as their costs tend to outweigh the returns on most investments.

According to research from JPMorgan Wealth Management, the average annual stock market return rate runs between 6% to 7% once you account for inflation.  

Keep in mind, you’ll want to account for your risk tolerance and level of savings when deciding how to allocate extra funds in your budget. 

When It Might Not Make Sense To Pay off a Loan Early

While less debt certainly sounds good, an early loan payoff isn’t always your best move. Here are some scenarios where you may want to adhere to the loan’s original terms and conditions. 

• Your loan has a hefty prepayment penalty. An exorbitant prepayment penalty could negate all or more of your interest savings.  
• You have other higher-interest debts, in which case using extra funds on a low-interest balance will cost you more money in the long run.  
• You don’t currently have an emergency fund. It’s generally recommended to have at least one to six months’ worth of expenses banked in a high-yield savings account, so you’re financially prepared for emergencies.   
• You’re nearing the end of the loan with little interest remaining. In this scenario, you may not need to sacrifice any cash flow or could benefit from directing those funds into an investment account instead. 
• Prepaying the loan could hurt or blunt your credit. If you have few or no other open credit accounts, you might want to pay the loan as originally agreed to build your credit mix and establish a longer payment history.

Paying off your loan early can be a smart strategy, but be sure you’re carefully weighing the pros against any cons. Chipping away at even a portion of your loan’s balance is one step closer to better finances.

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