Can You Pay Off a Personal Loan Early?
Bills Bottom Line
Personal loan lenders let you repay the full balance before the term ends. Some personal loans have a prepayment penalty, so check your loan documents first. The interest you owe on most personal loans is calculated based on the remaining balance. If your lender doesn’t charge a prepayment penalty, early payoff could save you money.
Table of Contents
- How to pay off a personal loan early
- Does your loan have a prepayment penalty?
- How much you could save by paying early
- Paying part of a personal loan early vs. paying it all off
- Ways to pay off a personal loan faster
- When to use the money elsewhere
- What paying off a personal loan early does to your finances
- Bills Action Plan
- Key Terms
You’re partway through a personal loan and have extra cash—perhaps a bonus—and want to eliminate your monthly payment. First, check whether your lender allows early payoff.
Whether paying early is worthwhile is a separate question. It depends on your loan terms and what else you could do with the money.
How to pay off a personal loan early
Before paying off your loan, confirm that your lender allows early repayment and find out the exact amount needed to close the loan.
Will your lender let you repay early?
Yes. You can pay off a personal loan before the term ends, though some loans charge a prepayment penalty.
What your payoff amount includes
Your payoff amount is the total needed to close the loan. It differs from your current balance because it may include interest through the payment date, unpaid fees, and any prepayment penalty.
Ask your lender for a payoff quote. It will include a good-through date—the deadline for sending payment. Because personal loan interest typically builds up daily, paying after that date may mean owing more. If the date passes, request an updated quote.
Once you pay in full, the lender closes the account, and your credit report reflects the closed account.
Does your loan have a prepayment penalty?
Some personal loans charge a fee for paying off all or part of the loan early. The fee pays the lender for interest it won’t collect. It may be:
- A percentage of the balance you repay early
- A set number of months’ interest
- A flat fee listed in your loan agreement
If the penalty is close to the interest you’d save, paying early may not be worthwhile.
Where to find your prepayment terms
- Loan agreement: Any prepayment fee must be disclosed in the agreement.
- Truth in Lending disclosure: Federal law requires this disclosure to state whether an early payoff penalty applies.
- Your lender: Ask in writing if you’re unsure.
When you refinance
Refinancing means paying off your original loan with a new one. If your current loan has a prepayment penalty, include it in the refinancing costs. If you’re comparing replacement loans, check their prepayment terms, too.
How much you could save by paying early
You generally pay more interest when your balance is highest, so paying off the loan sooner could save interest.
With an amortizing loan, you make equal payments toward principal and interest. Early payments cover more interest; later payments cover more principal.
For example, a $15,000, five-year loan at a fixed 12% APR, with simple interest and no fees, would have monthly payments of about $333.67 and total interest of about $5,020.
| Payoff point | Interest already paid | Remaining balance | Interest avoided |
|---|---|---|---|
| After the first year | $1,675 | $12,671 | $3,345 |
| With one year left | $4,771 | $3,755 | $249 |
The payoff after year one saves more than 13 times as much interest as the payoff with one year left. Run your own numbers with the personal loan calculator.
Paying part of a personal loan early vs. paying it all off
An extra payment toward principal lowers your balance and may shorten your loan term. Your monthly payment usually stays the same unless your lender recalculates it.
How your lender applies the payment affects your savings. A payment toward principal reduces future interest; money held unapplied does not reduce your balance or save interest.
This table compares three extra-payment options for a $15,000 loan, starting after the first year. It assumes payments go toward principal and there’s no prepayment penalty.
| Approach | Monthly payment | Remaining term | Interest cost from that point |
|---|---|---|---|
| Full payoff of $12,671 | $0 | None | $0 |
| One-time extra payment of $3,000 | $333.67 | 35 months | $1,806 |
| Recurring extra payment of $100 a month | $433.67 | 35 months | $2,390 |
| No extra payment, for comparison | $333.67 | 48 months | $3,345 |
Ways to pay off a personal loan faster
Two other options can shorten your loan: biweekly payments or refinancing.
Pay biweekly. Pay half your monthly payment every two weeks. With 26 half-payments a year, you’ll make the equivalent of 13 full payments, reducing your balance and shortening the loan term. Ask your lender whether it offers this schedule.
Refinance to a shorter term. A new loan pays off your current loan. Choose a term shorter than the time remaining to repay it sooner. Your monthly payments will be higher, but you may pay less interest. Factor in any origination fee when weighing the cost against your expected savings.
When to use the money elsewhere
Consider putting the money toward other priorities if:
- You have higher-rate debt. Credit card rates typically exceed personal loan rates, according to Federal Reserve data. Paying off your highest-rate debt first can save you money.
- Your emergency savings are low. An emergency fund can help you avoid borrowing when unexpected costs arise, the Consumer Financial Protection Bureau says. Once you pay off your loan, you’ll need to apply for a new one if you need to borrow again.
- Your loan has a prepayment penalty. If the fee nearly matches the interest you’d save, keeping the money in savings may be a better choice.
If none of these applies, paying off your loan early may be a good use of the money.
This table compares three ways to use $3,000 over one year. The rates are examples, not typical rates, and assume your payments on each debt stay the same.
| Use of $3,000 | Result after one year |
|---|---|
| Pay down the example loan at 12% APR | About $380 in interest avoided |
| Pay down a credit card balance at 24% APR | About $805 in interest avoided |
| Hold as emergency savings | $3,000 still available |
What paying off a personal loan early does to your finances
Paying off a loan early can affect two things lenders review: your credit report and your debt-to-income ratio.
Effect on your credit score
Your score may dip slightly, especially if the loan is your only installment account. Closing it reduces your mix of account types. The account’s age still counts while it remains on your credit report.
Your on-time payment history stays on your report. A closed account in good standing can remain there for up to 10 years. Payment history is the largest factor in a FICO Score.
Effect on your debt-to-income ratio
Paying off the loan removes its monthly payment from your debts, lowering your debt-to-income ratio (DTI). DTI is your monthly debt payments divided by your gross monthly income. Lenders consider it when you apply for credit.
Bills Action Plan
- Check your terms. Request a payoff quote and note its deadline. Review your loan documents for any prepayment penalty.
- Compare your options. Weigh paying off the loan against paying other debts, building emergency savings, or using the money elsewhere.
- Confirm the payment. For a partial payment, ask how the lender will apply it. For a full payoff, get written confirmation and check that your credit report reflects the closed loan.
Key Terms
Payoff amount: The amount needed to close your loan on a specific date, including what you owe, interest, and any fees.
Prepayment penalty: A fee some lenders charge when you pay off all or part of a loan early.
Amortization: How loan payments reduce your balance over time. Early payments cover more interest; later payments cover more principal.
Precomputed interest: Interest calculated for the full loan term at the start. If you pay early, you may get only part of it back.
Principal: The amount you borrowed and have not repaid. Interest is charged on it.
Do you get the origination fee back if you pay off a personal loan early?
No. The fee covers the lender’s upfront costs and is typically deducted from the loan before you get any money.
How long does it take for a paid-off loan to appear on your credit report?
It usually appears after your lender’s next update to the credit bureaus. Because updates are often monthly, it may take a month or two. If the loan still shows a balance after that, contact your lender and provide your payoff confirmation.
Can you borrow again after paying off a personal loan early?
Yes, but you’ll need to apply for a new loan. A personal loan gives you a set amount upfront, which you repay on a fixed schedule. A personal line of credit lets you borrow, repay, and borrow again up to your credit limit.