If you are considering paying off your personal loans early, there are a few things you need to take into account. First, you should make sure that doing so is within your budget. You don’t want to put yourself in a difficult financial position just to pay off personal loans early. Second, you need to check with your lender to see if there are any prepayment penalties. Some lenders will charge a fee if you pay off your loan ahead of schedule.
Finally, it’s always wise to have at least three to six months of emergency savings saved up before you focus on paying down debt. As long as you’re making your minimum monthly payments, your credit score won’t be affected. However, paying off personal loans early does give you more flexibility in your budget and can help you avoid paying additional interest charges.
Is it a good idea to pay off personal loans early?
Paying off personal loans early can be a great way to save money on interest and improve your debt-to-income ratio. However, there are some potential drawbacks to consider as well. Some lenders may charge a prepayment penalty for early payments, and using the extra income to pay off your personal loans early means it won’t be available for other expenses.
Additionally, making on-time monthly minimum payments can help boost your credit score, so you may miss out on that opportunity if you pay the whole thing off early.
Before making the decision to pay off your personal loans early, weigh the pros and cons carefully to see if it’s the right move for you:
|Saving money on interest||Check for prepayment penalties|
|Freeing up money earlier than expected||Credit scores could be affected|
|Lower debt-to-income ratio||You may not have the money to make the extra payment, negatively affecting your budget|
If you’re thinking about prepaying your personal loan, there are a few things to consider first. While there are some benefits to doing so, there are also some potential drawbacks that could affect your credit.
Before making a decision, be sure to check for any prepayment penalties that may apply. You’ll also want to consider whether you have the extra money available to make an early payment without straining your budget.
If you decide that prepaying your loan is the best option for you, here are five steps to take:
1. Break down your payments
As long as your lender does not charge any prepayment penalties, you can break down your monthly loan payment into two biweekly payments. This is the easiest way to work down your debt faster.
By breaking down your payments this way, you will be making one additional payment per year, thus speeding up the payoff process. This method allows you to reduce your total interest paid and shorten the overall life of the loan by splitting your monthly payment into two chunks and paying a little more on each.
If you have a loan with a monthly minimum payment of $400, you could make smaller biweekly payments of $200 instead. This would allow you to pay off your debt more quickly without exhausting your funds. However, speak to your lender before making this change, as some lenders may have stricter repayment plans or may charge prepayment penalties.
2. Make extra payments
If you don’t have enough extra income to make higher payments every month, you can still make extra payments from time to time to work down your debt.
Consider using extra income from holidays, birthdays, bonuses, and other extra savings throughout the year. It can even be as simple as skipping eating out once a month so you have a little extra money in the budget for your loan payment. This method is just about changing up your habits slightly to make room in your budget for extra loan payments.
Organizing your budget and saving where possible is always a good idea, especially if you want to pay off personal loans early. However, you do not have to pay off your personal loans early if your budget is tight. As long as you are making monthly minimum payments on your loan, you are in good shape. However, finding space in your budget for an extra loan payment every so often will help you pay down your loan faster and cut down on the interest.
3. Consider adding a secondary income
If you have the time, finding extra income could be a good way to save up to pay off your personal loans early. Getting a side hustle doesn’t have to mean getting a second job. There are a variety of ways to make a little extra money. You could try babysitting, pet sitting, tutoring, food, grocery delivery, opening an Etsy shop, driving for Uber, and countless other endeavors.
Having a side hustle has become increasingly popular, with 40 percent of Millenials reporting their side hustle makes up at least half of their income. However, a survey found that 41 percent of people with a side hustle do so to cover everyday living expenses. Only 17 percent of people with side hustles put that extra income toward savings, and only 12 percent use the funds to pay down debts.
If you are considering starting a side hustle to pay down your debts, make sure you allocate funds to everyday expenses and savings before worrying about paying off your debt.
4. Revisit your budget
Building and maintaining a monthly budget is a great way to organize your finances and see where you have opportunities to save. However, it can be difficult to maintain a budget, especially as inflation continues to be high and many are struggling to make ends meet. Only 32 percent of U.S. households prepare monthly budgets.
Making a monthly budget allows you to track your spending habits and determine where you could cut back and save. For example, a recent survey found that 42 percent of respondents were paying for subscription services they no longer used. If you are looking to allocate more funds toward repaying your loans, reorganizing your budget and looking for places to make cuts could be a great way to do that.
If you are new to budgeting, there are resources available to help you get started. It could also be worth speaking with a financial advisor if your situation is more complicated or if you need more specialized advice.
5. Look into refinancing your personal loan
Another way to potentially shorten the life of your loan is by refinancing. You can refinance a single loan or you can combine several loans into one with a debt consolidation loan.
Refinancing allows you to transfer your current debt to a new loan with a lower interest rate or a different repayment plan. Refinancing your loan can lower monthly payments and get you out of debt faster.
However, refinancing a loan is not right for every circumstance. You should only refinance your loan if you can secure a lower interest rate on the new loan or if you need to extend your repayment term. If your credit score has increased recently and you think you may qualify for lower interest rates with the new score, refinancing could help you secure that lower rate.
Refinancing your loan and securing a lower interest rate will lower your monthly payments, allowing you to pay off the loan more quickly. It also gives you the chance to choose a shorter repayment period, which will shorten the life of your loan overall.
Review the terms of your lender before deciding to refinance. If you are almost done paying off your loan, or if the interest rate on a refinanced loan would be higher, this process is likely not worth it. Pay attention to the fees you would have to pay.