How to Pay Off a Personal Loan Faster

Fact checked by Ward WilliamsFact checked by Ward Williams

You can pay off a personal loan faster, saving you money in interest. Four ways of paying off your personal loan faster include:

• Making biweekly payments
• Making extra payments or a lump-sum payment when you can
• Refinancing the loan
• Budgeting your finances to allocate more towards debt reduction

Paying off debt like small 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. Discover how you can pay off your personal loan faster and how much in total interest you could save.

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.
• Making biweekly instead of monthly payments results in one extra payment per year, paying off your personal loan faster.
• Paying more than the minimum monthly payment can pay down a personal loan faster.
• Refinancing your personal loan to a lower rate but maintaining the original payment can pay off the loan sooner and save on interest.
• 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 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.

Note

According to the Federal Reserve, in May of 2024, the average interest rate for a 24-month personal loan was 11.92% versus 21.51% 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 that paying off a personal loan instead of a mortgage early can result in greater returns. Auto debt and student loan debt also usually come with lower rates than personal loans.

However, before you pay off a personal loan early, you should consider the potential financial consequences. 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 determine where extra cash is going and which expenses are unnecessary. Cutting those from your spending can free up more money for personal loan payments to pay off your 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 You Need a Budget (YNAB), PocketGuard, and Empower (formerly Personal Capital).

Refinance Your Loan

Refinancing your personal loan involves taking out a new loan and using the proceeds to pay off your existing loan. Typically, borrowers go through a bank or credit union to refinance a personal loan to take advantage of a drop in market interest rates. As a result, they would lower their monthly payment and repay the loan by the original payoff date.

However, instead of using the refinance to lower your rate and monthly payment, you could maintain the original payment amount. By not reducing the payment, despite the lower rate, more money gets applied towards the principal—or the outstanding loan balance. As a result, you save more in total interest and pay off the loan faster.

Sometimes, a refinance can be done to extend the loan term, resulting in a lower monthly payment. However, be aware that you could pay much more in interest over the loan’s lifetime.

Although personal loan interest rates can fluctuate, rising and falling with overall market rates, you may still have an opportunity to refinance in any market. Even against the backdrop of higher rates, you could potentially still qualify for a lower rate if your income has increased, your debt has decreased, and your credit score has improved.

Example of Paying Off a Personal Loan Faster

Before refinancing, it’s important to calculate how much the lower interest rate will save you over the life of the loan.

Let’s say you have a $10,000 personal loan with an 11% interest rate and a 60-month repayment term (five years), but you could qualify for a refinance at a lower rate of 7%.

Below are the details of how much interest you could save by shortening the loan term and paying it off sooner.

Original Loan

• Loan amount: $10,000
• Interest rate: 11%
• Monthly payment: $217.42
• Total interest cost: $3,045.45 over the five-year term

Refinanced Loan

• Loan amount: $10,000
• Interest rate: 7%
• Monthly payment: $239.46
• Total interest cost: $1,494.20

By refinancing to a lower rate but forgoing a lower monthly payment, and making a slightly higher payment instead, you could pay off the loan in 48 months versus 60 months. In other words, it would cut a full year from the loan term, and you’d pay nearly half of the total interest.

The example above shows a refinance in the first year of the loan to illustrate how much money can be saved by paying it off early when refinancing. In reality, the refinancing would occur at some point during the loan’s term after making several payments. As a result, you would save less in interest if you refinance later in the loan’s term, but you’d still pay off the loan sooner than you would with the original five-year term and rate.

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

• Possible prepayment penalties

• 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 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 financial goals.

The Bottom Line

Some advantages and disadvantages 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 help free up money for other financial goals.

Read the original article on Investopedia.