When you are in a financial jam, a personal loan can provide you with the quick cash you need. But these types of loans are not a cure-all: They typically carry high interest rates. One way to cut interest costs is to pay off your loan early.
An accelerated payoff can come with major benefits and serious drawbacks. A thorough understanding of your loan terms and your financial circumstances can help you decide whether paying off a personal loan ahead of schedule makes sense.
Can You Pay Off a Personal Loan Early?
Typically, you can pay off a personal loan early no matter who issued it.
“I can’t think of a scenario I’ve seen where you can’t pay off a personal loan early,” says credit expert Gerri Detweiler.
But this does not mean that paying off a loan early is always a wise idea. For example, some personal loans have prepayment penalties. If you pay off a personal loan early, you might owe a fee for the privilege of doing so.
Check whether your lender charges a prepayment penalty.
“Most personal loans don’t carry a prepayment penalty,” Detweiler says. “If that’s the case with your loan, you’ll save money by paying it off faster.”
What Are the Pros of Paying Off a Personal Loan Early?
The biggest advantage of speeding up loan payoff is that it can save you money.
“In many cases, paying off a personal loan early will save the borrower money in interest,” says Thomas Nitzsche, financial educator at Money Management International, a nonprofit credit counseling agency.
With loan payments out of the way, you free up money to pad your monthly budget. You may have more funds to direct to another financial goal, such as investing, saving for a down payment or just having more “fun money,” Nitzsche says.
Borrowers with high debt-to-income ratios will find that paying off personal loans early can reduce theirs, “possibly increasing their chances of being approved for another loan,” he says.
You can also expect emotional rewards. “Paying off a loan is a huge emotional relief for many consumers, particularly if the loan was related to past trauma or associated with a difficult or negative period in their life,” Nitzsche says.
You will not have to stress over future payments, Detweiler adds, or what to do if your life circumstances change.
“If your income goes down or other expenses go up, you won’t have to worry about whether you can cover the payments,” she says. “Being debt-free, or closer to it, can mean peace of mind.”…ReadMore…