How to Pay Off a Personal Loan Faster (2024)

You can pay off a personal loan faster by putting a lump sum of extra money toward the principal, paying extra each month, or making biweekly payments instead of monthly payments, among other strategies. Paying off debt like personal loans is generally considered a good financial move, although in some cases it may be better to use the extra money in other ways.

Key Takeaways

  • One way to pay off a personal loan faster is to put a lump sum of money, such as a gift you receive, toward the loan balance.
  • If you make biweekly payments instead of monthly payments, you will make one extra payment per year and pay your personal loan off faster.
  • To pay down a personal loan faster, you can pay more than the minimum payment each month.
  • Paying off a personal loan early comes with financial benefits like saving money on interest and getting out of debt faster.

Is It a Good Idea to Pay Off Your Personal Loan Early?

Paying off a personal loan early is a good idea in many situations, but it does have some potential downsides to consider.

Paying off a personal loan may not be a good idea if you have any higher interest debt because paying that debt can save you more in total interest. For example, you may want to pay down credit card debt as quickly as you can, as credit cards tend to have high interest rates that can compound and put you in more debt.

According to the Federal Reserve, in August of 2023, the average interest rate for a 24-month personal loan was 12.48% versus 21.19% for a credit card.

However, if you have a personal loan with a higher interest rate than your other debt, it may be a good idea to pay it down early to help you save money on interest and reduce your debt load. This can improve your credit score and help you free up cash in your budget.

Mortgages tend to have lower interest rates, so you may find paying off a personal loan instead of a mortgage early can have greater returns. Auto debt and student loan debt also usually come with lower rates than personal loans.

Before you pay off a personal loan early, however, you should consider the financial consequences of doing so. For example, you may have to reduce your spending to pay extra toward the principal each month. Make sure extra loan payments will work with your budget. You'll also want to know about any prepayment penalties that can apply and whether your interest savings will offset them.

4 Ways to Pay Off Your Personal Loan Faster

You can take specific steps to pay off a high-interest loan quickly to save money on interest. Here are some strategies:

Make Biweekly Payments

First, you can consider making biweekly payments toward the loan balance instead of monthly payments. This strategy can help you cut months off your loan's repayment term, and you may not feel the impact if you are paid every two weeks.

For example, let's say you have a personal loan with a $200 monthly payment, and you decide to make biweekly payments of $100 instead of paying monthly. If you did this, you would wind up paying $2,600 toward the loan over the year (with 26 biweekly payments over 52 weeks) instead of the $2,400 you would pay over 12 months.

Make Extra Payments When You Can

You can also get out of debt faster by making extra payments, even if said payments are irregular. For example, you can put any gift money you receive toward a personal loan balance throughout the year, or you could make extra payments when you earn more than you expected.

If you use an online loan calculator, you can see how changing the payment amount will help you pay off a loan faster and save you money. For example, using Investopedia's online calculator, you can see that if you borrow $5,000 with an interest rate of 10% and a 5-year term, you would owe $106.24 per month for five years and pay a total of $1,374 in interest. If you put an extra $25 per month toward the loan, you could pay it off 1.2 years sooner and save $333 in interest payments.

Use a Monthly Budget

Look for ways to cut spending so you can pay more toward your loan. Reviewing your budget can help you figure out where extra cash is going and which expenses are not necessary. Cutting those from your spending can free up more money to use toward personal loan payments to pay off your personal loan faster.

You can also try a budgeting app to help you develop a strategy for saving and spending that will allow you to put more toward your loan.

Some of the best budgeting apps include Mint, You Need a Budget (YNAB), and PocketGuard.

Refinance Your Loan

Finally, consider refinancing your personal loan, but only if you can get a lower interest rate than you have now. If you refinance at a higher rate or extend your repayment plan to get a lower monthly payment, you could easily wind up paying more in interest and for longer than you need to.

While interest rates for personal loans are higher now than they were a few years ago, you could potentially still qualify for a lower rate now if your credit score has improved, your debt is lower, or your income is higher.

Calculate how much refinancing a personal loan would save you in interest and how much faster you could pay it off. If you had a $10,000 personal loan with an 11% interest rate and a 60-month repayment term, you would pay $217.42 per month and $3,045.45 in interest in total. If you qualified for a lower rate of 7%, however, you could make a slightly higher monthly payment of $239.46 for 48 months (four years), cut a full year from the loan term, and pay just $1,494.20 (about half) in total interest charges over that time.

Pros and Cons of Paying Off Your Loan Early

Paying off a personal loan early has significant benefits in interest savings, but there are still some downsides.

Pros

  • Get out of debt faster

  • Pay less in interest

  • Reduce financial stress

Cons

  • Opportunity cost

  • Prepayment penalties are possible

  • Temporary impact on credit score

Pros explained

  • Get out of debt faster: Making extra loan payments can shorten your loan's repayment term, saving you months or even years of loan payments.
  • Pay less in interest: Extra payments also reduce the principal balance of the loan, which means less interest is charged on the loan in subsequent months.
  • Reduce financial stress: Getting out of debt faster and saving on interest can give you peace of mind and make it easier to keep up with other expenses and bills.

Cons explained

  • Opportunity cost: If you throw all your disposable income toward extra loan payments, you could miss out on savings and investment opportunities or have a lower quality of life.
  • Prepayment penalties are possible: Some loans charge prepayment penalties, although fees for early payments are relatively rare. Either way, you'll want to read over loan paperwork to check for prepayment penalties before you make extra payments.
  • Temporary impact on credit score: Paying off a loan can temporarily ding your credit score in a few different ways, including removing this debt from your credit mix, which is a factor that makes up 10% of your FICO score. Paying off a loan can also shorten the average length of your credit history, which makes up 15% of FICO scores. However, these factors are generally minimal compared to the positive impact of reducing your debt.

What Is the Typical Penalty for Paying Off a Personal Loan Early?

While prepayment penalties on personal loans are relatively rare, some lenders may charge fees for early payoffs. Lenders may charge a flat amount, a specific time period's worth of interest, or a percentage of the remaining loan balance.

Will Paying Off a Loan Hurt My Credit Score?

Paying off a loan can potentially have a small negative effect on your credit score in the short term, since it can remove a loan type from your credit mix and could shorten the average length of your credit history. However, loans that are paid off and closed in good standing remain on your credit reports for 10 years, and the benefits of getting out of debt early can be well worth any temporary impact on your credit.

Can you Take Out a Loan and Pay It Back Immediately?

You can take out a loan and pay it back immediately, but you can still incur costs. For example, many personal loans charge upfront origination fees that are automatically deducted from the loan proceeds. There are also potential prepayment penalties.

Can I Lower My Monthly Personal Loan Payment?

You can lower a monthly personal loan payment if you qualify for a lower interest rate or you choose a longer repayment term. However, choosing a longer repayment term without a lower interest rate can cost you significantly more interest over time.

Is It Better to Pay a Personal Loan Weekly or Monthly?

Making a payment toward a loan more than once per month can help you pay down debt faster and reduce interest payments. However, the best payment frequency for your needs depends on your budget and what you're trying to achieve.

The Bottom Line

There are advantages and disadvantages that come with paying off a personal loan early, yet the pros almost always outweigh the cons. After all, getting out of debt has major upsides outside of interest savings and fewer payments to make each month. Becoming debt-free can make life easier and less stressful, and it can help free up money for other financial goals.

How to Pay Off a Personal Loan Faster (2024)

FAQs

How to pay off a 5 year loan in 2 years? ›

5 Ways To Pay Off A Loan Early
  1. Make bi-weekly payments. Instead of making monthly payments toward your loan, submit half-payments every two weeks. ...
  2. Round up your monthly payments. ...
  3. Make one extra payment each year. ...
  4. Refinance. ...
  5. Boost your income and put all extra money toward the loan.

Is it worth paying off a personal loan early? ›

If you have personal loan debt and are in a financial position to pay it off early, doing so could save you money on interest and boost your credit score. That said, you should only pay off a loan early if you can do so without tilting your budget, and if your lender doesn't charge a prepayment penalty.

How can I pay off my personal loan early? ›

Tips for paying off personal loan early
  1. Review the debt you owe. ...
  2. Understand your repayment capability. ...
  3. Try to make an extra payment. ...
  4. Round up the EMI amount. ...
  5. Use a bonus to make a larger payment. ...
  6. Consider doing a loan balance transfer. ...
  7. Documents to be submitted to the lender: ...
  8. Documents to be collected from the lender:
Mar 31, 2022

How can I pay off my private loan fast? ›

You can pay off a personal loan faster by putting a lump sum of extra money toward the principal, paying extra each month, or making biweekly payments instead of monthly payments, among other strategies.

Does it hurt your credit to pay off a loan early? ›

Yes, paying off a personal loan early could temporarily have a negative impact on your credit scores. But any dip in your credit scores will likely be temporary and minor. And it might be worth balancing that risk against the possible benefits of paying off your personal loan early.

How to pay off $9000 in debt fast? ›

To pay off $9,000 in credit card debt within 36 months, you will need to pay $326 per month, assuming an APR of 18%. You would incur $2,735 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.

Does a personal loan hurt your credit? ›

A personal loan can affect your credit score in a number of ways⁠—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.

Do banks like it when you pay off loans early? ›

First, check with your lender about any prepayment penalties. Obviously, interest is how lenders make money, so some mortgages include prepayment penalties to compensate for the revenue they will lose if it's paid off early. Some lenders limit how much you can prepay toward your loan each year.

Can I lower my personal loan payment? ›

This means you can look into refinancing your personal loan to lower your interest rate and monthly payments. In some cases, you can secure a new, longer term, which can also lower your monthly payments, thereby making them more manageable for your budget.

How can I pay off 5000 in debt fast? ›

Debt avalanche: Make minimum payments on all but your credit card with the highest interest rate. Send all excess payments to that card account. Once you pay that account off, send all excess payments to your next highest rate. Repeat until all of your debts are paid off.

Can you pay off a personal loan instantly? ›

You can always repay a personal loan early. However, some lenders will charge a significant fee for exiting your loan agreement early.

What happens if I pay a lump sum off my loan? ›

It'll Speed Up Your Loan Payoff Time Frame

In addition to reducing what you're handing over to the lender for interest, a lump sum payment would also get you closer to being debt-free faster.

How do I pay my loan ASAP? ›

Save as much as possible from your income to make extra loan payments whenever possible. Pay off personal loans before other loans, as personal loans come with higher interest rates than home or car loans. Make sure not to dip into your savings and emergency funds to pay off your loan early. Do not overthink it.

How to clear loans quickly? ›

Here are some tactics you can use to pay off your personal loan more quickly and reduce interest costs:
  1. Make payments larger than the minimum required amount: Every extra contribution helps! ...
  2. Make payments more frequently than required: Some lenders permit bi-weekly payments.
Apr 2, 2024

Can you pay off a personal loan immediately? ›

Is it possible to pay off a personal loan early? It is possible to pay off your personal loan early, but you may not want to. Making an extra payment each month or putting some, or all, of a cash windfall, toward your loans, could help you shave a few months off your repayment period.

How can I pay off my debt in 2 years? ›

Dave Ramsey says most people get out of debt in two years using the debt snowball method. With the debt snowball, you prioritize paying off your smallest debts first. The debt snowball is a good option, but if you have a high credit score, debt consolidation will save you more money.

How can I pay off my mortgage 5 years early? ›

Tips to pay off mortgage early
  1. Refinance your mortgage. ...
  2. Make extra mortgage payments. ...
  3. Make one extra mortgage payment each year. ...
  4. Round up your mortgage payments. ...
  5. Try the dollar-a-month plan. ...
  6. Use unexpected income.

How to pay off a car loan in 2 years? ›

5 ways to pay off a car loan faster
  1. Consider refinancing your current car loan. ...
  2. Make biweekly instead of monthly payments. ...
  3. Round up your payments. ...
  4. Find extra money for payments with a budget. ...
  5. Review your car add-ons.
Oct 31, 2023

What happens if I pay an extra $100 a month on my car loan? ›

Your car payment won't go down if you pay extra, but you'll pay the loan off faster. Paying extra can also save you money on interest depending on how soon you pay the loan off and how high your interest rate is.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Amb. Frankie Simonis

Last Updated:

Views: 5777

Rating: 4.6 / 5 (76 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Amb. Frankie Simonis

Birthday: 1998-02-19

Address: 64841 Delmar Isle, North Wiley, OR 74073

Phone: +17844167847676

Job: Forward IT Agent

Hobby: LARPing, Kitesurfing, Sewing, Digital arts, Sand art, Gardening, Dance

Introduction: My name is Amb. Frankie Simonis, I am a hilarious, enchanting, energetic, cooperative, innocent, cute, joyous person who loves writing and wants to share my knowledge and understanding with you.