- Check out refinancing. A series of on-time payments will improve your credit, and with an improved credit comes the opportunity to get a better interest rate. Consider refinancing your loan or consolidating your debt to lower your monthly payments.
- Cut expenses. Look at your monthly budget and find areas to cut back, even if it’s simply adjusting your thermostat or cutting cable. Read our guide to budgeting to find some more ideas.
Before you start applying any of these tips, make sure your lender allows you to make extra payments without additional charges and that you have enough extra income to cover what you’re spending.
It depends. Some lenders will penalize you for paying off your loan early as a way to make back a portion of the interest you would have paid if your loan had gone to term.
Prepayment penalties
Prepayment penalties or exit fees are usually included in the loan contract before you sign, so if you know you’re going to be paying early, avoid lenders that charge these.
Typically, a prepayment penalty is a percentage of the loan balance you’re paying off. So the sooner you pay off your loan early, the larger the penalty you pay. Lenders apply this so they don’t lose on the lost interest payments.
Precomputed or add-on interest
Since there are plenty of lenders that don’t have prepayment online installment loans MI penalties, it’s in your best interest to also research ones that don’t precompute your interest. Also known as add-on interest, this is where lenders calculate the amount of interest you’ll pay over the life of your loan and add it to the principal.
It might seem convenient, but it will cost you more if you decide to pay your loan early. An interest refund will be given to you, although this still won’t be as cheap as finding a loan that accrues interest daily rather than including it all as one lump sum.
When should I avoid paying off my loan early?
Paying off your debt could remove a weight from your shoulders, but it might not be the best choice. There are times when sticking it through to the end is beneficial.
- Your lender charges a high early repayment penalty. Calculate the amount of money you’d save on interest against the prepayment penalty your lender charges. If it’s more than you’d save – or means you won’t save a lot – you may not want to pay off your loan early.
- You don’t have a long credit history. Debt can be beneficial to new borrowers and those with less-than-perfect credit. Making regular monthly payments can help build your credit, which could score you lower rates on future debt.
- You could add to your savings. Rather than paying off your loan early – especially if the monthly payments are affordable – you could place money into a savings account. This way, you’ll be earning interest and helping yourself avoid debt later on.
- You could invest the money. Like adding to your savings, working with an investor to build your portfolio might help you earn more money than you’d save by paying off your debt early. It’s not guaranteed, but it could be something to look into.
Will paying off a loan early hurt my credit score?
It might. Once you pay off your personal loan, it will be considered a closed account on your credit report. If closing that account reduces the diversity of your credit portfolio or shortens your payment history, you may end up hurting your credit score even though you’re saving money on interest.
