Money tips for everyday life
Paying Off Your Personal Loan Early: What You Need to Know
When you find yourself with extra cash, perhaps from a tax refund, a bonus at work, or disciplined budgeting, you might ask: can you pay off a personal loan early? The short answer is yes, most personal loans typically allow for early repayment. However, before you send that final check, it is important to understand how the process works and whether it’s the right financial move for your specific situation.
Can I Pay Off My Personal Loan Early?
In many cases, you can pay off a personal loan early at any time. Doing so can save you money on interest charges, as you are reducing the principal balance faster than originally scheduled.
However, the "cost" of paying off a loan early depends on your lender’s policy regarding prepayment penalties.
- No Prepayment Penalties: Lenders, like those Upgrade partners with, do not charge fees for paying off your loan before the term ends. This means every extra dollar you put toward your balance goes directly to reducing your debt.
- Prepayment Fees: Some lenders charge a fee to compensate for the interest they lose when you pay early. It’s smart to always check your loan agreement for these terms before making a large extra payment.
Is it Bad to Pay Off a Loan Early?
You might wonder, is it bad to pay off a loan early for your credit score? While paying off debt is generally a positive financial move, there are some minor factors to consider:
- Credit Mix: If the personal loan is your only "installment" account (as opposed to "revolving" accounts like credit cards), closing the account might slightly change your credit mix, which could impact your credit score.
- Credit Age: Closing an account can sometimes lower the average age of your credit history, which can also impact your credit score.
Despite these minor credit fluctuations, the interest savings typically outweigh the small, temporary impact on your score assuming there are no prepayment penalties or fees.
How to Pay Off Personal Loans Faster
If your goal is to close a personal loan early, you don't necessarily need to pay the full balance at once. You can use these strategies to accelerate your progress:
- Make Bi-Weekly Payments: By paying half of your monthly bill every two weeks, you end up making 13 full payments a year instead of 12.
- Round Up: Simply rounding up your payment to the nearest $50 or $100 can shave months off your loan term.
- Apply Extra Money: Use "found money," like birthday gifts or bonuses, to make a one-time payment toward the principal.
Should I Pay Off My Personal Loan Early?
Deciding if you should pay off your personal loan early depends on your other financial priorities. It might be a great idea if:
- Your loan has a high interest rate
- You have already built an emergency fund
- You have no higher-interest debt (like credit card balances)
- There is no prepayment penalty or it is far less than you would pay in interest for the duration of the loan term
If your loan has a very low interest rate and you could earn more by putting that extra cash into a high-yield savings account or investment, you might choose to stick to the original schedule. Here are some of the pros and cons broken down for you:
Feature | Pros of Early Repayment | Cons of Early Repayment |
Interest Savings | Reduces the total interest paid over the life of the loan. | Opportunity cost if you could earn more by investing that cash. |
Monthly Budget | Eliminates a monthly bill, freeing up cash for other goals. | Depletes your current liquid savings or emergency fund. |
Credit Score | Lowers your overall debt-to-income (DTI) ratio, which can help improve your credit score. | May cause a minor, temporary dip as an active account closes. |
Debt Stress | Provides the psychological "win" of being debt-free sooner. | Potential prepayment fees (though Upgrade does not charge these). |
Explore Your Options
With a personal loan through Upgrade, you have the flexibility to pay off your balance as fast as you want without worrying about hidden prepayment fees, helping you stay in control of your money and financial future.
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 7.74%-35.99% and a 1.85%-9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For certain discounts, collateral may be required. Repayment terms from 24 to 84 months. For example, if you receive a $10,000 unsecured loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR and other terms of your loan may vary and you may not be presented with multiple offers. If offered, your loan terms, including your rate, will depend on credit score, credit usage history, loan amount, and other factors. Late payments or other fees, as noted in your Borrower Agreement, may increase the cost of your fixed rate loan. Certain loan offers may not be available in all states.
Upgrade is a financial technology company, not a bank. Personal loans issued by Upgrade's bank partners: https://www.upgrade.com/bank-partners/.
