What Happens if You Pay off a Personal Loan Early

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By: Melina Duffett, Contributed by Kim Gallagher

May 29, 2024

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5 minute read

Summary

Discover the pros & cons of paying off a loan early. Learn how to tackle debt by paying off a personal loan ahead of schedule & if it's a smart move.

In this article:

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.
  1. 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.

This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.

Frequently asked questions

Here are a few things that affect your eligibility

  • Financial history Credit history
  • Income and expenses
  • Loan purpose
  • Whether you have filed for bankruptcy
  • State of residence

Before you close your loan, OneMain will need the following documents from you:

  • A copy of a valid, government-issued ID (driver’s license or passport)
  • Your Social Security card
  • Proof of residence (driver’s license with current address, utility bill, or signed lease)
  • Proof of income (pay stubs or tax returns)

We may ask for more info based on your unique situation. Take the next step and start your loan application today

  • From the start of the application to receiving the funds could be as quick as one day.*
  • Completing the online loan application: Takes just minutes to complete and see your offers*
  • Signing your loan documents: After final loan approval, signing your closing documents takes about 30-45 minutes.
  • Receiving your funds: When using your debit card to receive funds, you can get your money as soon as an hour after signing the loan docs.1 Funds can also be paid out by direct deposit (ACH), which are available approximately 1-2 banking days after loan closing. A check can be issued as soon as the same day as the closing.

*Timing may vary based on: when you submit your application, how many documents are needed for approval, and how long it takes for OneMain to receive, review, and verify those documents, and whether your loan is secured by collateral, among other factors.

Are you still wondering "Is a personal loan right for me?" Don't worry – we're here to help. Just call (800) 961-5577 or find a branch near you.

If you're approved for a loan, you may see secured or unsecured next to your offer. A secured loan requires that you provide collateral, like a vehicle. An unsecured loan doesn't require any collateral from you.

Keep in mind that there are eligibility requirements such as the condition and age of your motor vehicle and proof of insurance. Also, if a borrower defaults on a secured loan, the lender has the right to take the collateral.