Having unpaid debt can feel like an incredibly heavy burden at times. That credit card balance that’s constantly increasing due to interest or that unpaid personal loan with a high monthly payment could be intruding on your thoughts regularly or keeping you up at night. When debt begins to accumulate, causing you a fair amount of financial anxiety, it may be a sign that it is time to pay off your debt early.
Paying off a personal loan early could be beneficial to you in so many ways. However, it is not always easy to do depending on how your loan works and what your overall financial situation looks like. There are several strategies that could help you be successful in paying off your personal loan early if you are willing to put in the effort.
Can You Pay Off a Personal Loan Early?
The first thing that must be determined before you can move forward with paying off your personal loan early is if your loan agreement includes a prepayment penalty. Lenders make money through interest payments on the loans they approve, so their profit decreases when a borrower pays off a loan ahead of time. To offset this loss in revenue, lenders charge additional fees called prepayment penalties.
Not all personal loans have prepayment penalties, but it is important for you to consult your loan documents to check especially if you are considering paying off your loan early. What kind of prepayment penalty a personal loan has will vary depending on the lender. The prepayment penalty could be a flat fee, a percentage of the remaining balance, or even a whole year’s worth of interest.
Before taking out a personal loan, to begin with, it’s crucial to discuss all the loan terms with your lender, including whether they charge a prepayment penalty if you wish to pay off the loan ahead of time.
Why Should You Pay Off Personal Loans Early?
When your personal loan has little to no prepayment penalties, there are a host of reasons why it might be an excellent idea to pay off that debt early. Once a personal loan has been paid off, you won’t need to worry about monthly payments anymore. Depending on the size of the loan, no more payments could mean significantly more money in your monthly budget for other things that you’d much prefer to put your money towards.
In addition to the extra money in your budget, paying off your personal loan early can improve your credit and save money on interest:
Your Credit Score
Your consumer credit report plays a huge role in your ability to meet the financial goals you wish to work towards. And your payment history is central to your credit report. Payment history is so important that it makes up 35% of your credit score calculation.
Consistent on-time payments in your credit history and paying off your loan early will bring about a massive improvement in your credit report. Minimizing your debt load will increase your overall creditworthiness and boost your credit score, which will enrich your financial opportunities immensely.
Probably the best benefit you’ll get when you pay off a personal loan early is the extra money you save from less interest. Interest rates are typically applied at loan payments, so each month you skip in your repayment schedule by paying the personal loan early will save money. The earlier you pay it off, the more money you save on the costs of personal loan rates.
This extra money you save when you pay off a personal loan early can be put to other uses that make your life better. You can put that money towards paying down your credit card debt or saving for your dream vacation.
Best Tips and Tricks For Paying Off Your Personal Loan Early
Just because it might be a good idea to pay off personal loans early doesn’t mean it is an easy task to accomplish. Personal loans can be challenging to pay off quickly, especially when you already have a limited budget or other installment debt to worry about, like a car loan. However, there are a few strategies you can employ to make your financial goals more doable.
Take a look at these tips and tricks for paying off your loan ahead of time:
Rearrange Your Budget
The first thing you will need to do to pay off a personal loan early is to sit down and take a hard look at your budget. Look at where your income goes in a given month and see if there is any rearranging you can do within your typical expenses. A perfect example of this is putting a temporary hold on monthly subscriptions until your loan has been paid off and redirecting that money towards extra payments.
Cut Down Unnecessary Expenses
After rearranging, review how you might be able to minimize certain expenses down to what’s necessary. If your monthly food budget includes a significant amount of delivery and eating out, cut down that budgetary expense by a certain percentage. The extra cash that provides to your discretionary income can go towards your loan debt.
Round Up Your Minimum Payments
When you make your on-time payments each month, always round up from the minimum payment. Even if rounding up on your minimum payments is the only thing that you can do, it will still make a significant difference in when your loan is paid off by. For example, say your minimum payment is $155, pay $200 instead, as that will make a bigger dent in your balance.
Make Bi-Weekly Payments
Instead of the standard monthly payment, biweekly payments could also help your debt disappear faster. Biweekly payments are a great way to keep yourself more accountable for paying off your loan quickly because it ensures that the debt balance is at the forefront of your mind throughout the month. Doing this will also reduce the amount of interest you pay in your monthly payment.
Put Any Windfalls Towards Your Personal Loan
Occasionally we are lucky enough to get a financial windfall. This could look like a holiday bonus at work or a massive tax refund. Usually, you’d want to use this surprise chunk of cash to go shopping or treat yourself in some other way, but this is the exact kind of opportunity that you should take advantage of to pay off your loan quickly.
Take that financial windfall and put it all towards your personal loan or other high-interest debt. A large enough extra payment could mean there is one less financial obligation for you to worry about, and you get to see a major improvement in your credit report.
Increase Your Income
If your current income is limiting your ability to make extra payments on your existing loan, it could be the right time to ask for that raise you’ve been working towards in your current job. For those who can’t swing a raise, working a couple of extra hours a week in overtime or through a side hustle could increase your income enough to pay extra on your loan.
Financial Tips For After Your Loan Is Repaid
After successfully paying off your loan early, what are your next best steps? When paying off debt, it’s essential to make good financial decisions directly after becoming debt free, so you can maintain an excellent credit profile and increase your potential savings.
Here are a few necessary financial decisions everyone needs to make after moving on from a paid-off personal loan:
Make An Emergency Fund
Add a designated emergency fund savings account to your collection of bank accounts. A hefty emergency fund can negate the need for personal loans or other financial products in the future. When an unexpected expense occurs, people typically turn to credit cards, personal loans, or cash advances. But with saved money set aside, particularly for emergencies and unexpected expenses, you can rely on your own cash with no interest rate involved.
Decrease Your Credit Utilization
If you have some credit card debt left after paying off your loan, decreasing your credit utilization could help you improve your credit score even further. Your credit utilization ratio is the amount of used credit compared to the overall credit limit. Most opinions expressed by financial experts recommend a credit utilization ratio of 30% or lower. Put some extra money towards your credit card balances to minimize your ratio and improve your overall financial health.
Start Planning For the Future
And finally, start thinking about your future and how you can plan and prepare for it financially. This could mean saving to become a homeowner or planning for retirement. Begin making investments that will produce wealth for a comfortable future. Do what you can to anticipate the needs you might have so you have a reliable cushion to fall back on if life doesn’t go as planned because it very seldom does.