What Happens if You Pay off a Personal Loan Early

If you’ve found yourself with extra money and wanted to put it towards paying down debt, you might be wondering if you can pay off a personal loan early. The short answer is yes.

23.2 million Americans had an unsecured personal loan in 2023.¹ They’re a popular choice for debt consolidation or pricey home repairs. But, as with any loan or debt, personal loans can have a significant impact on your financial status.

While paying off a loan early may seem like an attractive choice, it’s important to understand the impact it could have on your finances. If you’re unsure about paying off your personal loan early, our pros and cons can help you make an informed decision.

What are the pros of paying off a personal loan early?

Opting to pay off a personal loan ahead of schedule could potentially have a positive impact on your debt and credit.

• You might save money on interest
  The sooner you pay off your loan, the less you’ll have to pay in total interest. If you have an interest-bearing loan, this means less daily simple interest will accrue. If you have a precomputed loan, you may be eligible for a refund or rebate based on how much earned interest had already been paid. Check with your lender to see how much money you could save by paying early.

• It can lower your debt-to-income ratio
  Early loan pay-offs can affect your credit score in a variety of ways. A positive is that it will lower your debt-to-income ratio, which is calculated by dividing your total debts by your income. A low debt-to-income ratio, around 20% or less, can help increase your credit score.

• You’ll have fewer monthly payments
  Paying off your loan early gives you one less monthly payment to worry about. That means fewer bills to juggle and obligations to keep track of, which is always a good thing!

Once your personal loan is paid off, you’ll be able to put that extra money in your budget towards other financial goals, like building an emergency fund, or paying off other debts. It can be a great feeling to know that money you had been using to pay off a personal loan is now being used to improve your financial future. Being mindful with your money can have a positive impact on your health, as well as your bank account.

What are the cons of paying off a personal loan early?

Though it may seem counter-intuitive, paying off your loan early could have some drawbacks.

• You might be subject to prepayment penalties
  Although it’s increasingly rare, some financial institutions charge a prepayment penalty fee, which is associated with paying off a loan early. The prepayment penalty fee can vary based on how much the loan was for and how the fee is charged; the fee can be a percentage of a loan balance; a fixed fee; or the lender’s lost interest. This helps the lender recover the interest money that they’re losing. If the fee is larger than the interest you’re saving, it might actually be smarter to pay off the loan on schedule and avoid the cost of the prepayment fee.
  
  If your loan has a prepayment penalty, it will be written into your loan contract. Be sure to carefully review your paperwork to determine whether you’ll be subject to a penalty fee and how much it is.
  
  At OneMain, we never charge early payment fees, so customers are empowered to take charge of their finances and do what's best for them.

2. It could impact your credit history
   One factor that determines your credit score is your credit history, which is the length of time you’ve been making regular payments. If you have a short history with few open accounts, having a personal loan could help your credit. Building a long history of loan payments can boost your credit score. Paying off a loan before establishing a solid credit history could lead to missing out on the chance to build a stronger credit foundation.

Does paying off a loan early hurt your credit score?

Generally, no. If you have many debts and are trying to get them under control, paying off a loan early may be a good idea. However, if you have few debts and a short history, you may be missing an opportunity to build a history of on-time payments. You should consider the tradeoff of building your credit history vs continuing to pay interest, especially if your rate is high.

When does paying off a personal loan early make sense?

The decision to pay off a personal loan early is, well, personal. Ultimately, you’re the best judge of your own financial situation. If the pros outweigh the cons, you might consider paying off your loan early. But if cons like a prepayment penalty fee are cause for concern, you should take some time to decide what makes the most sense for you.

Informed Decisions Always Pay Off

Whether or not you choose to pay off a personal loan early, weighing the pros and cons of a big decision is always a good idea. Do your homework and read the fine print to determine the best course of action for you and your financial future.

---

1. Credit Balances on the Rise as Consumers Manage Higher Costs https://newsroom.transunion.com/q3-2023-ciir/

This article has been updated since 2022. Kim Gallagher contributed to this article.