There are any number of reasons why you may have decided to take out a personal loan. Maybe you needed some fast cash to pay for a car repair or wanted to consolidate your debt.
But if you’re thinking about paying off your personal loan early to save money on interest charges, make sure you research your loan’s prepayment penalties. This common fee increases your cost to pay off your personal loan early.
Depending on your loan contract, you may get hit with a prepayment penalty if you pay off your loan early. The penalty may be based on a percentage of your outstanding balance or be equal to months’ worth of interest. It all depends on your lender and loan terms.
In all cases, it’s best to contact your lender or review your loan terms to determine the types of penalties you’ll face, if any. Many personal loan lenders are free of prepayment penalties, such as SoFi, PNC and FreedomPlus.
You should also be prepared for a potential temporary dip in your credit score. However, this won’t be the case for all borrowers, as it’s dependent on your unique credit situation. You may see a dip in credit if one of the following applies to you:
- The personal loan was your only installment account. With no open installment account, your credit mix will suffer. Credit mix accounts for 10% of your FICO score.
- It was your only low-balance account. The outstanding balances on open accounts is considered when determining your credit score. If your personal loan had a lower balance and your remaining accounts all have high balances, your credit could suffer.
With all that said, this dip in credit could be short-lived. And it will be helpful to compare both of these drawbacks to your long-term interest savings to determine whether the early payoff is worth it.
If you’re unsure of how much money you’d save by paying off a personal loan early, check out our personal loan payment calculator. Plug in your current loan amount, interest rate and remaining loan term to determine the amount of interest you’ll pay by the time your loan reaches maturity. Then, try decreasing your remaining loan term or increasing your monthly payments to see how much sooner you’ll pay off your debt and the amount you’d save on interest.
See the math in action: Let’s say you take out a $10,000 personal loan with a seven-year repayment term and an 8% interest rate. The table below shows you how much you’d save if you decided to pay it off in six years. Note: This scenario assumes there’s no prepayment penalty.
|Savings from paying off your personal loan early|
|Monthly Payment||Interest Paid||Total Repayment|
|7-year repayment costs||$155.86||$3,092.42||$13,092.42|
|6-year repayment costs||$175.33||$2,623.93||$12,623.93|
|Savings by paying off your loan one year early:||$468.49|
Once you know how much you’d save in early loan repayment, you can compare those savings to your prepayment penalty, if you have one.
If you haven’t determined whether you have a prepayment penalty — and if you do, how much it’d be — now’s the time to do it. As we mentioned before, we recommend you review your loan terms or contact your lender to get this information.
To help you understand how large a prepayment penalty can be, check out the example below of a loan penalty for early repayment.
|Loan penalty for early repayment|
|Balance owed||Prepayment penalty percentage||Prepayment penalty amount|
Don’t want to pay a prepayment penalty? Try this
If you find that your lender imposes a prepayment penalty, try to negotiate the loan terms with them. They may agree to remove it. In the event they don’t, do the math. Will the prepayment penalty be less than what you’d owe on interest? If so, you may want to pay it.
If the prepayment penalty is the same or more than what you’d owe in interest, refraining from making any changes may be your best option. In that case, you’d continue to pay off your loan like usual, as an early payoff would not save you money.
In the event you’re in need of extra cash flow, though, you may find that the prepayment penalty is worth it, even if you don’t save money. That’s because the added cash flow can help you get ahead of other (potentially costlier) debts or help you qualify for needed credit.
If you’re ready to pay off your personal loan sooner, you can take one of these approaches:
- Refinance your personal loan. When you refinance a loan, you take out a new loan to pay off an outstanding loan. You can refinance your personal loan with your current lender. Or you can refinance with another lender that offers a more favorable interest rate and terms.
- Make biweekly payments. Your personal loan requires you to make fixed monthly payments. To get out of debt sooner, make biweekly payments instead. This is a great strategy if you get paid every two weeks. You’ll find that less interest accumulates because you’ll be making payments more often.
- Apply one extra payment each year. If you don’t have the cash flow to make bi-weekly payments, apply one additional payment to your loan principal each year. This money can come from your annual work bonus, a birthday gift, or tax refund. It can save you on interest as well.
Paying off your personal loan early can be a great idea, as long as there is no prepayment penalty or the penalty would be less than what you’d owe in interest.
Interested in a personal loan?Here are the top personal loan lenders of 2021!
|Lender||APR Range||Loan Amount|
|5.99% – 18.85%1||$5,000 - $100,000|
|7.86% – 35.99%||$1,000 - $50,000|
|5.94% – 35.97%*||$1,000 - $50,000|
|99.00% – 199.00%2||$500 - $4,000|
|5.99% – 24.99%3||$5,000 - $40,000|
|7.99% – 29.99%4||$7,500 - $40,000|
|7.99% – 20.88%5||$5,000 - $50,000|
|9.99% – 35.99%6||$2,000 - $36,500|
|10.68% – 35.89%7||$1,000 - $40,000|
|9.95% – 35.99%8||$2,000 - $35,000|
|1 Includes AutoPay discount. Important Disclosures for SoFi. |
2 Includes AutoPay discount. Important Disclosures for Opploans.
Direct Deposit required for payroll.
Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.
3 Includes AutoPay discount. Important Disclosures for Payoff.
4 Important Disclosures for FreedomPlus.
5 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
6 Important Disclosures for LendingPoint.
7 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 10.68% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 9.56% and a 5.00% origination fee of $300 for an APR of 13.11%. In this example, you will receive $5,700 and will make 36 monthly payments of $192.37. The total amount repayable will be $6,925.32. Your APR will be determined based on your credit at time of application. The origination fee ranges from 2% to 6% (average is 4.86% as of 7/1/2019 – 9/30/2019). In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,001 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
8 Important Disclosures for Avant.
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.
**Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33.
Based on the responses from 7,302 customers in a survey of 140,258 newly funded customers, conducted from August 1, 2018 – August 1, 2019, 95.11% of customers stated that they were either extremely satisfied or satisfied with Avant. 4/5 Customers would recommend us. Avant branded credit products are issued by WebBank, member FDIC.
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
Personal loans made through Upgrade feature APRs of 5.94%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Accept your loan offer and your funds will be sent to your bank or designated account within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes the transaction. From the time of approval, funds should be available within four (4) business days. Funds sent directly to pay off your creditors may take up to 2 weeks to clear, depending on the creditor. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.