How to pay off a personal loan early
To pay off a personal loan early, you can either make extra payments toward the principal balance or pay a lump sum.
The first thing you need to do is to contact your lender or read your loan agreement to determine whether there’s a prepayment penalty. Find out if the lender counts extra payments toward the principal or if you need to specify this when you send the money.
If you have a set timeline for paying off your loan early, you can calculate how much extra per month you need to repay. An early loan payoff calculator can make planning easier. If you don’t have a specific early payoff date in mind, you might try doubling payments each month or rounding up your monthly payment to the nearest hundred dollars.
If you are ready to repay your loan as a lump sum, ask your lender for a payoff quote, which should include a deadline for paying to avoid extra interest charges. Keep in mind that paying off your loan through an online account can eliminate costly delays that can occur when paying via check.
» MORE: How to use a credit-builder loan to establish credit
What to consider before paying off your loan early
Here are a few things to think about before you pay off your personal loan.
Does the lender charge prepayment penalties?
While many personal loans don’t have prepayment penalties, this fee is relatively common among lenders that serve subprime borrowers (those with lower credit scores). To determine whether your loan has a prepayment penalty, contact the lender directly and ask if the payoff amount includes any fees or penalties. You can also check your loan agreement.
Prepayment penalties start at about 1% of the outstanding balance on your loan. A lender may also charge a flat fee or a certain number of months’ worth of interest.
It’s worth your time and effort to find out whether you face these fees and how much they are if you decide to pay off your loan early. For prepayment to be worth it, the prepayment penalty should be less than the amount of interest you'd pay if you were to complete the full loan term.
Will paying off a personal loan early affect my credit score?
If your personal loan is the only installment loan reporting your payment activity to the credit bureaus, eliminating it could negatively impact your mix of different credit types. This may cause your credit score to decrease slightly. Paying off your loan early will also reduce the positive effects of your on-time payment history for the loan.
An online credit score simulator can help you anticipate how paying off your personal loan ahead of schedule may impact your credit score.
If you’re trying to qualify for a mortgage, talk to your loan officer before you take any action that could impact your credit score.
Does repaying your loan have clear benefits?
Before you stretch your budget or dip into savings to pay off your loan early, calculate your prospective savings. How much will you really save by paying off the loan early? Sometimes the savings are not as significant as you think, and you may be better off using your money to pad savings to start investing or to keep your emergency fund healthy.
“Before paying off your personal loan, be sure to first have at least one month’s worth of expenses in savings,” said financial expert Derek Sall.
If you have higher-interest debt or credit card bills, you might save more money by paying off that debt before paying off your personal loan.
There is one thing to bear in mind if you plan on applying for another loan soon: Reducing your personal loan balance to zero lowers your DTI ratio. If you’re trying to qualify for a mortgage or another loan type that requires a DTI ratio under a certain percentage, paying off your personal loan could help.
When not to pay off a loan early
In certain situations, paying off a loan early may not be the best financial decision. If your loan has a very low interest rate, you may be better off investing your extra funds in an account or asset that earns a higher return.
And if paying off the loan would deplete your emergency fund, it may leave you vulnerable to unexpected expenses. In these cases, it's better to maintain liquidity and keep cash on hand.
You should also avoid paying off a loan early if doing so would prevent you from meeting other financial goals, such as saving for retirement or paying down higher-interest debt first.
Should you pay off your personal loan or high-interest debt first?
Paying off high-interest debt can help you save money in the long run, as you’ll be spending less on interest. This means it’s often a good idea to tackle higher-interest debts before those with lower interest rates.
Use a loan calculator to determine how much you can expect to save (or on the flip side, how much you would expect to spend in interest) on each of your debts, including your personal loan, auto loan, student loans and credit cards. It’s generally wise to prioritize paying off debts that would otherwise cost you the most money in interest.
Pros of paying off a personal loan early
There are several perks for borrowers who can afford to pay off their loans early.
For instance, you'll save money on interest if you pay off your personal loan early. Every month you eliminate from the payment schedule by sending extra money to be applied toward the loan principal reduces the amount of time you'll make payments as well as the total amount of interest you'll pay over the life of the loan.
Additionally, paying off your loan early eliminates it from your monthly debt payment obligations, which reduces your debt-to-income (DTI) ratio. This gives you more breathing room in your budget and may better position you to qualify for future loans. Since you no longer have to make monthly payments, you can use that money for other debt repayment or building up your savings.
Early payoff benefits: at a glance
- Save money on interest by reducing the total amount paid over the life of the loan
- Eliminate monthly debt payments, freeing up money for other goals
- Lower your debt-to-income (DTI) ratio, which can improve your chances of qualifying for other loans in the future
Cons of paying off a personal loan early
Reducing your overall debt load is a great financial goal, but paying off a personal loan fast can have consequences, too. There are some potential downsides to paying off your personal loan early.
“It may be wiser to invest,” said Sall. “Say your personal loan is only 3%. Instead of paying that off, perhaps you could earn 5% or more on your money instead.”
Depending on your lender, you may be subject to a prepayment penalty if you pay off your loan early.
While you may save money on interest and eliminate the stress of owing money, you can also negatively affect your credit score by reducing your credit mix or missing an opportunity to build good credit with on-time payments.
When you pay off your personal loan early, the lender reports that activity to the credit bureaus. The loan is considered “closed” on your credit report. Closed accounts don’t weigh as heavily with the FICO credit score algorithm as open accounts, so all your on-time payments make less of a difference to your credit score after the account is paid in full.
Early payoff downsides: at a glance
- Possible prepayment penalties from the lender
- Missed investment opportunities if your loan interest rate is low
- Potential negative impact on your credit score by closing the account
FAQ
How much is the penalty for paying off your personal loan early?
Few lenders charge a prepayment penalty, but those that do charge a percentage of the remaining balance, a flat fee or a certain number of months’ worth of interest.
The lender must clearly state the details of any prepayment penalty in the agreement you sign to accept the loan. If you can’t determine whether a prepayment penalty is part of your personal loan, contact your lender and ask.
Can I refinance my personal loan?
Yes, you can refinance your personal loan with the same lender or a new one. Refinancing may make sense if you can secure a lower interest rate or if you need to extend the repayment term. Note that refinancing your loan is essentially getting a new loan, which can mean you’ll have to pay fees again.
Do I need to inform my lender that I plan to pay off my loan early?
It can be helpful to contact your lender before paying off your loan early, especially if you are unsure about a possible prepayment penalty. You may want to verify the exact payoff amount and find out if there are special instructions for sending the payment.
Will my credit score drop if I pay off my personal loan early?
Yes, your credit score may drop slightly when you pay off your personal loan early. This happens because paying off the loan closes the account, which can reduce your credit mix and limit the positive effects of your on-time payment history. The impact is usually small and temporary, but it’s important to be aware of before deciding to pay off the loan.
Bottom line
When deciding whether to pay off a personal loan early, evaluate the loan’s annual percentage rate (APR). If it has a lower APR than some of your other debt, such as a credit card or car loan, paying off those higher APR debts first could save you more money in the long run.
You should also consider where the payoff funds are coming from. Are you going to drain your savings or emergency fund to pay off your loan? If so, you could be putting yourself at risk of going into debt again if an emergency or a big, unexpected expense comes your way.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- First-Citizens Bank & Trust Company, “Extra payment calculator.” Accessed Dec. 30, 2025.
