Does it hurt or help your credit to pay off a loan early?
If you’re a pro budgeter or come into some extra cash suddenly, you may consider putting it toward paying off a personal loan early. This is a great way to save money and become debt-free quickly.
But before you do…
There could be some elements of paying off a loan that you may not have considered. So before you rush into making additional payments, take some time to learn about the benefits and drawbacks of paying off a personal loan early.
Benefits of Paying Off a Personal Loan Early
There are many reasons you might be interested in paying off a personal loan early. You’ll be able to save on interest, which could add up significantly over time. Without having a loan payment, you’ll also free up cash to do other things with your monthly budget. And if you’re looking to take out another loan, you’ll be more likely to qualify with other debts paid down. [1]
Think About Your Credit
There are many ways that paying off a personal loan early can have an impact on your credit. More often than not, when people talk about credit, they’re referring to their credit score and history. These two factors can be used to determine various things, such as creditworthiness for future lines of credit or mortgages, and even your insurance rates.
Because of this, it’s important to know the impact of paying off a personal loan ahead of schedule on your credit score. Generally speaking, paying off any type of balance is a good thing. But there are some instances where closing an account might negatively affect your score.
If your personal loan is the oldest line of credit you have, then closing it might shorten the length of credit on your history.
In general, if you need a stable credit score for a specific reason (like getting a mortgage), you should talk to a financial professional before closing out any accounts.
A Word About Prepayment Penalties
Personal loans come with specific terms and interest rates you agree to when you take the money. Lenders make a profit from the interest rate they charge and paying off your loan early will cut into that profit.
For this reason..
Some lenders charge exit fees if you want to pay off your loan before the previously agreed upon term is over.
Also called prepayment penalties, these exit fees vary depending on how much money you borrowed and how early you attempt to pay off the loan. You should review your prepayment penalties before taking out a loan so you know whether or not early payment will be worth the cost. [2]
Consider Your Options
Now that you understand how prepayment penalties work, it’s time to start thinking about the best decision for you. Everyone’s situation is different, but here are four possible options:
1. Negotiate With Your Lender
If you’ve reviewed your loan and find that the terms do include a prepayment penalty, you may be able to negotiate to have the fee removed. Talk to your lender and see what options are available to you.
2. Refinance the Loan
Don’t despair if the lender holds firm on the fee. You still have options to reduce the cost of your personal loan. Discuss refinancing the loan to get a better interest rate or more favorable terms.
You may be able to refinance through another lender if your current lender is unwilling to refinance. Make sure the refinance will save you more than the cost of the prepayment fee. [3]
3. Pay Off Your Loan Early
Even if you can’t get your prepayment penalty removed, it may still be worth it for you to pay off the loan early. Run the numbers and see if the prepayment will be less than what you would be paying in interest over the final duration of the loan term. If it is a smaller amount, it could be worth it for you to pay off the loan early.
Depending on the lender, it is often possible to pay off a loan early without penalty. When you get a personal loan at Power Finance Texas, you can rest assured that if you are able to pay off your personal loan early, you will not face a prepayment penalty of any kind.
If you are in a good position to pay off your loan ahead of schedule, you can gain additional financial flexibility. When you go this route, Power Finance Texas will also stop charging the daily interest fees that were associated with your personal loan.
4. Continue Paying Off Your Loan as Usual
At the end of the day, it may be best to continue paying off your loan as usual. If your prepayment penalty outweighs what you owe in interest, sticking with your monthly payments will save you money overall.
How To Pay Off a Personal Loan Early
If paying off a personal loan early does make sense for you, there are a few ways to make it happen a little faster. Start off by trying to pay down the loan every two weeks rather than every month. If you get a paycheck every two weeks, this can be easily budgeted into your expenses.
You may also want to consider getting a side job to save up extra cash to put toward the loan. Any money you have left over at the end of the month can go toward your payment and help you become debt free even sooner than you originally planned. [4]
Take Your Time Deciding
Handling how you pay off a personal loan is a big decision that requires some research. Take your time exploring all your options and weighing the pros and cons of each. You’ll be glad to have thoroughly explored how paying off a loan early will affect your bank account. [5]
References
3 – https://www.foxbusiness.com/money/refinancing-personal-loan-things-to-know
4 – https://helixfi.com/blog/importance-of-paying-your-loan-off-early
5 – https://www.adityabirlacapital.com/abc-of-money/personal-loan-benefit