Personal loans can be a great way to take care of financial challenges, but they come at a cost. Some loans have high interest rates, others may have terms that can carry a penalty for early repayments. But there are many situations where it can make sense to pay off a loan early.
Being familiar with your loan agreement and knowing what to look for is where to start. There are some situations where paying off your loan early can make sense, and other scenarios where it might not. Read on to look at all the angles so you can determine which is the right move for yourself.
Is It an Option to Pay Off a Personal Loan Early?
In most cases it’s an option to pay off a loan early, but sometimes there can be prepayment penalties. Looking within the terms of your agreement is a good place to start. Most loans do not carry a penalty for early repayment, but it’s important to check your terms and not assume.
Pros of Paying Off a Personal Loan Early
By far the biggest advantage to paying your loan off early is the money you would save that would otherwise go to interest payments. Should you choose to pay your loan early, you can use that extra money for smart money moves like building up your emergency fund, paying down other debt or putting more money towards your savings. Paying off early is also beneficial as it would lower your utilization rate, which is about 30% of your credit score.
Cons of Paying Off a Personal Loan Early
If you were to put everything towards paying off your loan early, in some cases it can leave you in a jam. Should something come up like repairs or other unexpected expenses, you may find yourself searching for ways to cover costs. Additionally, using extra money that might be put to better use like when you could get better returns is another way of determining where you might want to place your money.
Does Paying Off a Loan Early Affect Your Credit?
You may find your credit score drops a little, but it usually returns to its previous position in a short amount of time. How your credit report responds to early payment of your loan can also depend on whether you have other active installment loans. If you don’t have a car, mortgage or other types of installment loan payments, it can disrupt your credit mix and may affect your overall credit score.
Is Paying Off a Loan Early Right for You?
You can start by using a loan calculator to determine how much you might save. Even if you have a prepayment penalty within your terms, it’s still worth checking the numbers to see whether it would work in your favour. The thing to do is run the numbers in each scenario you can think of to see if things look worthwhile. This would include if you were to put the extra money intended to pay off a loan towards other opportunities you may find.
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As you get close to paying off your loan, the option of paying it off early will often cross people’s minds. The best way to know for sure if it’s the right move is to check for any prepayment penalties and run the numbers. Even with a penalty it can still make sense, so you would want to check how it works out using more than one scenario.