Borrowing money doesn’t come without extra costs. Interest alone could potentially add hundreds of extra dollars to what you already have to pay back.
But interest isn’t the only added cost. Many lenders enforce fees just for borrowing money from them. For some loans, you could get hit with a fee for paying off your loan early. That’s like getting punished for being on the honor roll.
Here’s what could happen to you if you want to pay off your personal loan early and how to avoid getting slapped with an added cost.
Paying off your personal loan early
Before you start making the extra payments, go over your loan agreement and look for a prepayment penalty. This is a fee that lenders can enforce if you pay off your loan before the end of the term.
Lenders have this fee to ensure that they recoup some of the interest costs they would otherwise lose.
Interest is a big moneymaker for lenders. If you pay off your personal loan early, it means the lender isn’t making as much money. Not all loans allow prepayment penalties, but personal loans do. But it’s up to each lender about enforcing the penalty.
What happens when you pay a loan off early
A prepayment penalty varies by your loan, lender, and terms.
Typically, it’s based on a percentage of the remaining loan balance or months’ worth of interest. If you’re planning on paying off your loan months or years early, there could be a drastic difference in your penalty fee.
Because there is no set amount when it comes to a prepayment penalty, it’s important to know the cost difference in paying your loan off when the term is up versus paying it off before the final due date.
Keep in mind that paying off a loan will close your account, which can cause a temporary dip in your credit score.
Open and active accounts will help your credit score go up. While you might save on fees, a credit score drop could hurt your chances of getting approved for more credit, such as another loan or credit card, in the short term.
Getting a prepayment penalty removed
If you’re unsure if your loan charges a fee for early payment completion, review your loan terms and talk to your lender. It’s important to find out if you’ll suffer from the penalty before you try to haggle your way out of it.
If your lender implements the fee, see if you can renegotiate your loan terms to have it removed. If you can’t, there are a few other things you can try:
- Refinancing: Try refinancing your loan with your current lender. If it’s not working out, explore refinancing through other lenders to find the best interest rate and terms.
- Pay early anyway: This depends on where you are in your repayment journey. If the prepayment penalty works out to be less than what you’d owe in interest, it might be worth taking the hit.
- Continue to pay like normal: If your prepayment penalty is the same or more than what you would owe in interest, you might want to avoid making any changes.
Since prepayment penalties vary by loan type, lender, and your loan terms, you’ll have to evaluate your situation. But before you take out personal loans in the future, research the fees that lenders put in place.
Many personal loan lenders tout low-cost fees — or no fees at all. Try to compare lenders that offer you the best loan terms with no fees and low interest rates. The less money you have to pay back on top of your original loan amount, the more money you can keep for yourself.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
|7.73% – 29.99%||$1,000 - $50,000|
|6.28% – 14.87%1||$5,000 - $100,000|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%||$5,000 - $35,000|
|4.99% – 29.99%||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%2||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%||$2,000 - $25,000||Visit LendingPoint|
|5.99% – 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%||$2,000 - $35,000||Visit Avant|