Pros and Cons of Paying off Your Personal Loan Early
ByMegan B. Shepherd
If youve saved a large amount of cash or come into a lump sum of money, you may be considering whether you can or should pay off your personal loan ahead of schedule. Youll always have the option to pay it off, and doing so can offer steep savings and financial well-being.
However, if you're still building your credit or your loan terms include prepayment penalties, youll need to weigh whether the advantages outweigh the possible disadvantages.
Advantages of paying off your loan early
Paying off your personal loan ahead of schedule comes with significant advantages beyond savings that can strengthen your financial situation.
Save on interest
When you pay off your loan ahead of schedule, you reduce the overall time that interest accrues. The earlier you pay off your loan, the greater the potential savings. This is especially true for longer-term loans with higher interest rates. Even a few months or years of early repayment can make a significant difference.
For example, lets say youve paid $5,000 toward a $20,000 loan with an interest rate of 7% and three years left on your term. If you pay the remaining $15,000 in one lump sum, youd save approximately $3,150 in interest.