If you took out a personal loan, you may wonder when to pay it back. In general, you have two choices: follow your repayment schedule or pay it off early. Your unique circumstances will help determine which route you should pursue. To help you decide, here’s a close look at the pros and cons of paying off your personal loan ahead of schedule, and use a personal loan calculator to help.
Benefits of Paying Off Your Personal Loan Early
The most noteworthy advantages of repaying your personal loan sooner than later include:
- Save money on interest: The faster you pay off your loan, the more you’ll save in interest. Depending on how soon you repay what you borrowed, this may lead to hundreds or even thousands of dollars in savings.
- Free up your monthly budget: Once your personal loan debt is gone, you’ll have extra money to put toward other financial goals. You can build your emergency fund, save for retirement, or finally take that dream vacation.
- Lower your debt-to-income ratio: Your debt-to-income ratio is your monthly debt payments divided by your gross monthly income. When you pay off a personal loan, you’ll lower your debt-to-income ratio and may boost your credit score. This can help you qualify for lower interest rates and more favorable terms in the future.
- Gain peace of mind: With one less debt on your plate, you’re sure to relieve some stress around your monthly finances. However, this only holds true if you can comfortably afford to repay your personal loan early and don’t have to tap into your savings or retirement funds.
Drawbacks of Paying Off Your Personal Loan Early
Before you pay off your personal loan early, consider these drawbacks.
- May have to pay a prepayment penalty: Although it’s rare, some lenders charge prepayment penalties to borrowers who repay their personal loan early. A prepayment penalty is usually a percentage of the unpaid principal loan balance and could cost you more than your potential savings. Check your loan agreement to find out whether you’ll be penalized for paying off your loan early.
- Might miss out on the chance to pay other debt: If you have other debt, such as credit card debt, for example, it may make more sense to focus on it instead. This is particularly true if it comes with a higher interest rate than your personal loan.
- If you’re trying to build credit: If you have very little information in your credit report, you may not be able to improve your credit score until you build a substantial history of timely payments. Of course, be sure to weigh your long-term credit goals against the interest expense of keeping a loan open.
At the end of the day, when you should pay off a personal loan is up to you. Before you decide what to do, think about your needs and priorities. Then, weigh the pros and cons of sticking to your repayment schedule or paying off your loan early. Best of luck with your decision!