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Personal loans can help you consolidate high-interest debt or finance big purchases such as home repairs or weddings. Although personal loans typically have short repayment timelines, there may be situations where you want to pay off a personal loan even faster. For example, reducing your loan debt could make it easier to qualify for a mortgage.
You can pay off a personal loan fast by creating a repayment plan, paying more than the minimum due each month and finding ways to put extra money toward your loan. Here's what to know before if you're thinking about paying off a personal loan early.
1. Check if You Have a Prepayment Penalty
Lenders make money from loans by charging interest. When you pay back a loan early, however, the lender isn't able to collect as much in interest payments. To offset this, some lenders charge a fee for paying off your loan early called a prepayment penalty.
Prepayment fees can vary depending on your lender. For instance, some lenders charge a flat fee, some charge a year's worth of interest and others may charge a percentage of the remaining balance. Read your loan contract or contact your lender to see if your loan has a prepayment penalty. If it does, ask how much that fee will be.
For a loan with a prepayment penalty, you'll need to weigh that cost against the savings in interest from paying off the loan early. Use a personal loan calculator to estimate your potential interest savings.
2. Make Extra Payments on Your Loan
When you make a payment on a personal loan, part of that money goes toward paying off the principal (the amount borrowed) and part of it goes toward paying off the interest. To pay off your personal loan faster, you'll need to make sure that any extra payments are applied only to the principal.
How to do this varies from lender to lender. Some lenders automatically apply any extra payments to interest, while others apply them to principal. Other lenders don't allow principal-only payments or charge a fee for making extra payments.
Contact your lender to find out if you can make extra payments toward principal only without incurring fees. For example, you might be able to add $100 to your monthly payment and designate that additional money as a principal-only payment.
3. Find Ways to Save Money
To prioritize paying off your personal loan early, review your budget looking for ways to squeeze out additional cash. For example, you might be able to:
- Audit your subscriptions. Cut out monthly subscriptions and memberships you aren't using, such as gyms, news publications or streaming services.
- Shop around for new auto and home insurance. Start by talking to your current insurance provider to learn if adjusting your coverage can reduce your rates. Then compare your options with other insurance companies to see if you can lower your premiums.
- Eat at home more often. Restaurant meals or workday lunches can add up fast. Try brown-bagging your lunch and cooking more often. Invite friends over for a potluck dinner instead of meeting at restaurants.
- Reduce discretionary spending. Cut back on extras like new clothes, travel or going out with friends. Unsubscribe from retailers' emails or social media accounts that may tempt you to spend unnecessarily.
- Buy secondhand. If you absolutely need something, try buying used. You can purchase quality clothing, furniture, electronics and more at secondhand stores or online. Another option: Join a local "Buy Nothing" or freecycle group. You can find these groups on social media and use them to request things you need that other people are giving away.
4. Look for Ways to Make More Money
You can pay even more toward your personal loan by finding ways to make more money. Here are some ideas to consider:
- Ask your boss for overtime or extra hours.
- Look for a job that pays more.
- Get a side job or gig work in your free time. For instance, you could walk dogs or drive for a ride-hailing service.
- Tutor local children, teach classes in art or music or teach English online to international students.
- Sell unwanted items on social media, eBay or specialized resale sites. For instance, you can use Poshmark or thredUP to sell clothing or Chairish to list furniture and home accessories for sale.
- Whenever you get extra money—such as cash gifts from relatives, tax refunds, work bonuses or raises—put it toward paying down your personal loan faster.
Should You Pay Off a Personal Loan Early?
Potential savings aren't the only variable to consider when deciding whether to pay off a personal loan early. You'll also need to weigh your credit score, overall debt load and financial goals.
If you can afford to do so, paying off a personal loan early does have benefits, including that it reduces your debt-to-income ratio, which can make it easier to qualify for credit. And once the loan is paid off, money formerly earmarked for loan payments can go toward other financial goals, such as saving for a home or investing for retirement.
If you decide to pay down your personal loan faster, consider signing up for Experian's free credit monitoring service. You'll get alerts to changes in your credit report and score so you can see how paying off your loan affects your credit.