Paying off a personal loan faster can save money on interest and free up room in your budget. But if you have higher-interest debts or you don’t have much savings, it may not be the best use of your excess cash. It’s also important to understand how your lender handles extra payments.
Can you pay off a personal loan faster?
You can pay off a personal loan faster, typically by paying more than the minimum on your monthly payment or by making extra lump-sum payments.
Personal loans rarely have prepayment penalties, which are charges a lender assesses to recoup some of their lost interest when a borrower pays off their balance early. Of 32 lenders surveyed by NerdWallet, none charged prepayment penalties for personal loans.
While few lenders penalize you for fast-tracking your loan payoff schedule, there are a few subtle differences in how they handle additional payments.
How to pay off a personal loan faster: 3 strategies
To pay off debt faster, you want extra payments going toward your principal balance (the amount you borrowed), rather than interest and fees. Most lenders apply additional payments — whether you pay more than your monthly minimum or make an extra one-time payment — to outstanding fees and accrued interest first, then to your principal.
1. Pay more than your monthly minimum
An easy way to pay off a personal loan faster is to tack on extra money to your monthly payment. For example, if your monthly loan payment is $347, you could round it up to $400 to pay down your principal faster.
If you use autopay, make sure your budget can comfortably support the higher payment amount on a regular basis. Otherwise, it’s best to use autopay to pay the minimum and make extra payments when you can afford it.
How lenders handle larger monthly payments: Lenders often treat larger monthly payments as principal-only payments, but some will put the extra amount toward your next monthly payment.
For example, if your minimum payment is $250 and you made a $500 payment in January, the lender may count it as your February payment as well. But to speed up your loan payoff and maximize your interest savings, you’d still want to make February’s payment as usual, even though you’re not required to do so.
2. Make occasional lump-sum payments
Using occasional windfalls like your tax refund or a bonus to make extra loan payments is a smart way to accelerate your debt payoff.
Try to continue making your regularly scheduled payments, even if your lender pushes your due date forward.
How lenders handle lump-sum payments: Many lenders automatically treat extra payments as principal-only payments, assuming you don’t have outstanding fees or accrued interest. However, some lenders treat these payments as early payments and reduce your monthly payment accordingly. If your extra payment covers more than a full minimum payment, the lender may also push your due date forward.
3. Make biweekly payments
Because there are 52 weeks in a year, you’ll make 26 half-payments if your lender lets you pay biweekly. That means you’ll make 13 total payments (instead of just 12) over a year. Many people also find that paying every other week syncs better with their pay schedules.
How lenders handle biweekly payments: Not all lenders allow biweekly personal loan payments. Some lenders make you jump through a few extra hoops, like making manual payments or calling customer service, to set up a twice-monthly schedule.
🤓 Nerdy Tip
Even if a lender doesn’t allow principal-only payments, you can often ensure that most of an extra payment goes toward principal by scheduling it for the same day as your regular payment. How lenders handle extra personal loan payments
| Extra payments are treated as early payments and may advance future due dates; scheduled autopayments aren’t affected. | |
| Extra payments are automatically applied toward the loan principal. | |
| Principal-only payments are allowed if you schedule them for the same day as your regular payments. | |
| Doesn’t allow principal-only payments; extra payments are treated as early payments and may advance future due dates. | |
| Extra payments go toward principal after outstanding fees and accrued interest are covered; SoFi suggests scheduling extra payments for the same day as regular payments to ensure it mostly goes toward principal. | |
| Extra payments are applied toward principal and accrued interest; regular payment amounts and due dates won’t change if you pay extra. |
» COMPARE: Our picks for the best personal loans
Pros and cons of paying off a personal loan faster
Pros
Save money on interest
More money in your budget
Lower DTI
Cons
Other debts may be more expensive
Could deplete your savings
Potential credit score drop
Pros in detail
Save money on interest. One of the biggest benefits of speeding up your personal loan payoff is the interest savings. Suppose you take out a $20,000 loan with a 12% annual percentage rate, five-year term and $445 monthly payment. You’d pay $6,693 in interest over the life of the loan.
Adding $50 to your monthly payment would save you $943 in interest and allow you to pay off your loan seven months faster.
More money in your monthly budget. Paying off your personal loan faster frees up money in your budget to put toward other financial goals.
In the example above, paying your loan ahead of schedule would leave you with an extra $495 each month (your $445 monthly payment, plus the extra $50). You could put those funds toward your emergency fund, other debt payments or a discretionary expense, like a vacation.
Reduce your debt-to-income ratio. Lenders often look at your DTI ratio, along with your credit history, in determining whether to approve you. A lower number is better. If you’re applying for a mortgage or other financing, reducing your DTI ratio by paying off a personal loan quickly could help you qualify.
Cons in detail
May not be your most expensive debt. Some types of debt, like credit cards, typically have higher interest rates than personal loans. To get the biggest savings, focus on paying off your highest-interest debt first.
Could deplete your savings. Using a large chunk of your savings to get rid of a personal loan faster could put you at risk if you’re hit with an emergency or unexpected expense.
Potential credit score drop. Paying off a loan sometimes causes a small drop in your credit score, often because you wind up with a less-diversified credit mix if the loan was your only form of installment credit. However, any negative impact tends to be short-lived, and paying off debt usually helps your credit score in the long run.
Refinancing vs. paying off a loan faster
When you refinance a personal loan, you replace an existing loan with a new one — ideally one with better terms. You use the new loan to pay off the old one.
Refinancing your loan instead of paying it off faster could make sense if your credit profile has improved since you took out the loan and you qualify for a better rate.
Let’s say you have $12,000 remaining on a loan with a 20% APR and a $400 monthly payment. But because you’ve paid down the debt, you now have better credit and qualify for a loan with a 10% APR and a three-year term.
By refinancing, you’d lower your payments by about $12 per month and shorten your debt payoff timeline by six months. Overall, you’d save $2,860 in interest over the loan’s lifetime. A personal loan refinancing calculator can help you figure out if replacing your current loan with a new one can save you money.
Frequently Asked Questions
What’s the fastest way to pay off a personal loan?
The fastest way to pay off a personal loan is to make principal-only payments. Paying more than your minimum amount due, scheduling extra payments and switching to biweekly payments can all help you get rid of the debt faster.
Is it worth paying off a personal loan early?
Paying off a personal loan early is often worth it if you’ll save money on interest and you don’t have other debts with higher APRs. If you’re applying for a mortgage or other financing, paying off a loan sooner can lower your overall debt level, which boosts your odds of qualifying.
How can I pay off $30,000 in debt in one year?
To pay off $30,000 worth of debt with a 10% APR in one year, you’d need to make monthly payments of about $2,637. Finding ways to make extra money can help you work toward this goal.
Will my credit score drop if I pay off a personal loan early?
Your credit score may temporarily drop after paying off your personal loan early, especially if you don’t have other forms of installment credit. But overall, paying off your debts tends to help your credit score.
