Can You Pay Off a Personal Loan Early?

Paying a personal loan off early could mean less money spent on interest. Plus, it can reduce your debt-to-income ratio (DTI), which could make it easier to qualify for another loan, rental, or mortgage. And as long as your personal loan doesn’t have a prepayment penalty, you can pay it off early with no financial repercussion.

But before doing so, consider what you have to gain as well as what you could lose with early repayment. In some cases, you might actually want to keep the loan.

Should I pay off my personal loan early?

Paying off a personal loan early can have the following benefits:

• Saves money on interest: The sooner you pay off a personal loan, the less money you’ll spend on interest, which reduces the overall cost of the loan.
• Reduces DTI: Since you’ll owe less money in relation to your monthly gross income, your DTI will decrease. As a result, lenders may be more willing to give you credit, or approve a higher loan amount or a lower interest rate. For example, if you’re looking for a car or new home, you could qualify for a more expensive model.
• A sense of pride: Paying off debt is an achievement you should celebrate. Plus, it’s one less bill to think about.

But it may not be the best option if:

• You replace it with higher-interest debt: If paying a personal loan early eats into money you have earmarked for other payments — like credit card debt — it could be a bad idea. If you’re considering paying off one debt while keeping another, pay off the one with the highest interest rate first.
• You don’t have an emergency fund: It might not seem smart to hold onto debt while you have money sitting in a savings account. But if you don’t have at least 3 months of living expenses saved up, it probably is. If an emergency strikes, you don’t want to have to scramble for a loan to cover it.
• You want to build your credit score: On-time payments are a great way to build your score, since 30% of your FICO score is determined by your payment history. Though a paid-off loan can indicate responsible borrowing as well, it just won’t have the same impact on your score. And since lenders consider the average age of your accounts, paying a personal loan early could significantly reduce that number — which could reduce your score — especially if you have few credit accounts.
• You have a prepayment penalty: Very few lenders penalize you for paying off a loan early, but you’ll want to make sure that your lender isn’t one of them.

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If you pay off a personal loan early, do you save on interest?

You can save a substantial amount in interest by paying off your personal loan early. Consider this example:

According to Credible loan rates data, the average interest rate on a 5-year loan for someone with a 700 FICO score was around 24% in October 2023. For a $10,000 loan, based on that rate, you’d pay $7,261 in interest over the loan’s term. However, if instead of paying for the whole five years, you paid the loan off after two, you’d save $3,024.

If you paid it off after three years, or two years early, you’d save $1,463.

The higher the rate is on your loan, the more you can save by paying it off early.

Prepayment penalty on a personal loan

A prepayment penalty is a fee a financial institution may impose if you pay off your personal loan early. The bank’s rationale is that you’re depriving it of income in the form of interest payments, so it reserves the right to penalize you to offset that loss. Fortunately, this practice isn’t common, and none of the personal loan lenders we review charge borrowers for getting out of debt too quickly.

However, you should review the fine print of any loan you already have or plan to get to see if it includes a prepayment penalty. If it does, you could see the fee in one of three ways, said Howard Dvorkin, chairman of Debt.com.

“First, [the lender] can charge you a percentage of your loan balance. That's usually around 2%,” he said. “Second, they can charge you a flat fee. Or third — and worst of all — they can actually charge you all the interest you're saving by paying early.”

How to pay off a personal loan early

You could pay your personal loan off early if you experience a windfall or otherwise have a large lump sum sitting in the bank. However, Dvorkin said, “You don't have to think so big. You can also pay off your loan early by nibbling away at it every month.”

Here are some strategies:

• Add extra funds to each payment: Even $10-$20 more per month can reduce your principal balance faster.
• Make payments biweekly: When you make payments every two weeks, you’ll submit an extra month’s worth by year-end.
• Make additional payments annually or when possible: For example, use some or all of a work bonus or monetary gift to pay down your debt.
• Increase your income: Then, put extra money toward your personal loan.

Refinance your personal loan

When you refinance your personal loan, you take out a new loan to pay off your existing debt. Generally, it may make sense to refinance if interest rates have dropped, or you’d qualify for a lower interest rate because your credit score has increased since you initially borrowed.

You can refinance a personal loan with another personal loan, or you could use another debt instrument, like a 0% APR credit card balance transfer. In the former scenario, watch out for origination fees — even if the interest rate is lower than what you currently pay, an origination fee could make the transaction more expensive. Instead of comparing interest rates, look at the loan’s annual percentage rate (APR) to get a truer measure of cost.

A 0% APR credit card could make sense if you pay off the balance transferred within the promotional period. If not, you could end up paying a higher interest rate than you would have originally. Note that balance transfers usually cost 3% to 5% of the amount transferred, which is added to your credit card balance.

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