Should You Pay Off Your Personal Loan Early?

Difference Between Payday Loans vs. Normal Loans
Written by Publishing Team

There are many reasons for people to take out a personal loan, including vacation costs, wedding expenses, home remodeling, and more.

Being in debt is stressful, and the penalty for defaulting on a loan can take the form of a lawsuit, a drop in your credit score, or exorbitant late payment fees. This is why it is so important that you do everything in your power to pay off your debts as quickly as possible. You’ve probably heard that paying off what you owe as soon as possible can help you save some extra dollars in the long run, and that is sometimes the case.

In general, the longer you default on debt, the more interest you will pay over the life of the loan. Hence, paying off the loan early seems like a good idea. However, before you finalize your payments several months in advance, there are a few things you need to take into consideration.

Is it possible?

Yes, it is possible to pay off your loan early, which helps you eliminate a few months of the repayment period. But note that some lenders may require a penalty fee to prepay the loan early.

This fee is either an amount that shows how much interest the lender will lose if you pay off the loan early or it is calculated as a percentage of what you have left to pay on the personal loan. Additionally, keep in mind that how the penalty is calculated will vary from lender to lender.

Also, all penalties are generally included in your loan agreement. On that note, if you decide to pay off your personal loan before the end of the loan term, contact the lender or check the loan documents to make sure you won’t incur the prepayment penalty fee.

Will it affect your credit score?

When it comes to paying off your credit card debt, you reduce the amount of debt associated with your credit limit. Meaning, your credit utilization rate is reduced; Thus, improving your credit score.

However, personal loans do not work in the same way because they are installment debts. On the other hand, credit card balances are revolving debt, which means you can borrow more cash up to your maximum credit while you make the payment. In addition, there is no set repayment period.

Keep in mind that annuity debts require you to pay back what you owe in equal and regular amounts within a specified repayment period. Once the debt is terminated, the account is then closed.

When you pay off a personal loan early, a shorter account life will appear on your credit report. Remember that the longer your credit history, the higher your credit score. With it, you can reduce your average credit score and length of credit history if you pay off a personal loan early. A low credit score may make it difficult for you to get a job, good financial products, or a home.

Moreover, when you pay off the debt early, you will miss the opportunity to repay it in time. Note that the more timely payments, the more help boost your credit score.

Things to take into account

Here are a few things to keep in mind if you decide to pay off your personal loan early.

  • monthly expenses. Consider your monthly expenses first before you decide to pay off your debts in advance. It doesn’t make sense to pay off your loan early if it hinders your living expenses.
  • Interest rate. Make sure to compare the interest rate of the loan you want to pay off in advance with your other debts. In general, debts such as credit card balances often come at exorbitant rates. Meaning, it makes sense to pay it off first. By paying off debt at the highest interest rate, you’ll save more interest charges in the long run.
  • retirement funds. Saving for retirement is very important, no matter your age. If possible, you should save money for retirement and not withdraw money from this account. As such, don’t use your retirement money to pay off your personal loan early; Doing so could result in heavy tax consequences.
  • Emergency savings account. An emergency savings account is designed to help you pay unexpected expenses such as car problems or medical bills. You should consider setting up an emergency savings account before paying off your loan early.


Is debt consolidation a good reason to get a personal loan, or is an emergency a good reason to get a loan? Well, both reasons make sense to get a personal loan. Personal loans can be an affordable and convenient way to pay large expenses.

Moreover, when used responsibly, it can improve your credit history. However, it would be better to consider if your situation will allow you to take advantage of a personal loan. Paying off the loan in advance can leave you with a place where you’re likely to undo any money you’ve saved with interest, pay a prepayment penalty, and potentially damage your credit history.

Michael launched Your Money Geek to make personal finance fun. He’s been in personal finance for more than 20 years, helping families lower taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustle, and all things geeky.


About the author

Publishing Team

Leave a Comment