How to Pay Off a Personal Loan Faster

If you’re carrying a personal loan, you’re not alone. According to recent data, over 20 million Americans have personal loans with an average balance of $8,018. While personal loans can be helpful, they can also be a burden if you’re struggling to make payments or want to pay off the loan faster.

This post reveals 15 tips to help you pay off your loan faster while saving some money. Not only can these strategies help you get out of debt more quickly, they can also help reduce your interest charges and improve your overall financial situation.

Can You Pay Off Personal Loans Early?

Whether you can pay off a loan early depends on the specific policies and terms outlined in your loan contract. Lenders may charge a prepayment penalty to make up for the loss of interest income they would have earned had you paid off your loan at the end of the term. Also, some lenders may require a minimum number of payments before allowing early repayment. 

Review your loan agreement or contact your lender to determine whether you can pay off your loan early and whether there is a penalty for paying off your loan early. Use a personal loan calculator to estimate how much interest you can save by paying off a personal loan early and compare it with any potential prepayment penalty. If the penalty exceeds the interest savings, it may not be worth paying off your loan early.

Why You Should Aim to Pay Off a Personal Loan Faster

Paying off a personal loan early offers the following benefits.

• Saving money on interest: The longer you take to pay off your loan, the more interest you pay over time. You may wonder whether you pay less interest by paying off a loan early. The answer is yes — paying off your loan faster can reduce the total interest you pay and save money in the long run.

• Improving your credit score: Your credit score is partly based on your credit utilization ratio, which is the percentage of your available credit you are using. A high credit utilization ratio can drop your credit score, while a low one can boost it. Paying off your loan faster can lower your credit utilization ratio and boost your credit score.

• Reducing your debt-to-income ratio: Your debt-to-income ratio is the percentage of your monthly earnings that goes toward paying your debt obligations. A high debt-to-income ratio can make qualifying for other loans or credit cards harder, while a low one can improve your chances. Paying off your loan faster can reduce your debt-to-income ratio and increase your borrowing power.

• Achieving financial freedom: A personal loan can cause stress and anxiety for many borrowers, especially if they struggle to make monthly payments or face unexpected expenses. When you pay off your loan faster, you can free yourself from this burden and have more control over your finances.

15 Tips to Pay Off a Personal Loan Faster

Now that you know why you might want to pay off your loan faster, here are some tips that can help you:

Create a Budget

Develop a comprehensive budget considering your income, expenses and debt obligations. Identify areas where you can cut spending and free up extra funds to allocate to your loan payments. This move can help you make significant progress toward paying off your loan and achieving greater financial stability in the long run.

Make Extra Payments

Making additional payments toward your loan principal can be a smart move, even if the payments are small. Doing so can significantly reduce the amount of interest you’ll end up paying over the life of the loan and help you pay it off faster.

Bi-Weekly Payments

One way to pay off your loan faster is by making half of your monthly payment every two weeks instead of once a month. This simple tweak will result in an extra yearly payment, helping you save on interest and pay off the loan sooner.

Round Up Payments

Consider rounding up your monthly payments to the nearest higher amount to speed up your loan repayment. For instance, if your payment is $485, rounding it up to $500 can make a significant difference over time. This adjustment can add up and help you pay off the loan more quickly.

Use Windfalls

Consider applying any unexpected windfalls directly to your loan balance to accelerate paying off your loan. These could include tax refunds, bonuses or gifts. By doing so, you can make substantial strides toward paying off your loan faster.

Cut Unnecessary Expenses

Reduce your discretionary spending, such as eating out or entertainment and reallocate those funds toward your loan payments. This simple strategy can help you unlock additional cash to put toward paying off your loan sooner.

Side Hustle

Look for part-time or freelance work to accelerate your loan repayment and increase your total earnings. This way, you can allocate the additional income toward your loan, which will help you pay it off more quickly.

Sell Unused Items

Simplify your living space and speed up loan repayment by decluttering your home and selling items you no longer need for extra cash.

Negotiate Interest Rates

Consider contacting your lender to explore the option of reducing your interest rate. An interest rate reduction can lead to significant savings over the course of your loan. Even a slight decrease in your interest rate can substantially impact your repayment schedule.

Refinance or Consolidate

If you have multiple loans or high-interest debt, consider consolidating or refinancing to secure a lower interest rate and possibly reduce your monthly payments. Refinancing replaces your loan with a new loan, usually with a lower interest rate. Consolidating refers to combining multiple loans into a single loan. Combining debt at a lower interest rate helps you save money over time and pay off your loans faster.

Avoid Minimum Payments

Always pay more than the minimum required payment to pay off your loan faster and reduce the principal balance. This practice not only helps you save money on interest over time but also allows you to make a bigger dent in the overall balance. 

Prioritize Extra Payments

If you have multiple loans, prioritize repaying the one with the highest interest rate first while continuing to make minimum payments on the others. This way, you can save on interest charges and pay off your loans faster.

Automate Payments

Set up automatic payments to ensure you never miss a due date and accrue late fees. This hack can also help you stay on track with paying off your loan faster.

Stay Motivated

To maintain your motivation throughout the loan repayment process, it’s important to keep your goal of paying off the loan in mind. One way to do this is by visualizing your progress using a chart or spreadsheet that tracks your decreasing balance. 

Seek Professional Advice

Consulting with a credit counselor or financial adviser may be beneficial if you struggle to make payments or require further guidance. They can help you explore available options and devise a repayment plan that is feasible for you.

Pay Off Your Personal Loan Faster and Save Money

Paying off your personal loan early can benefit your financial well-being and provide peace of mind. To achieve this goal, follow the tips above and accelerate your repayment plan. Before making any decisions, check with your lender for potential prepayment penalties or fees. It’s also worth comparing the interest savings with the opportunity cost of using your extra money for other purposes, such as investing or saving for emergencies. These steps empower you to make wise and strategic financial decisions when paying off a loan early.

Frequently Asked Questions