How to Pay Off a Personal Loan Faster

You can often pay a personal loan off early, and doing so has its benefits, including saving money on interest. However, you may face a prepayment penalty, depending on the fine print of your loan and an early payoff can temporarily affect your credit.

Take a look at some of the pros and cons of an early loan payoff and learn how to pay off a personal loan faster.

Consider the following strategies if you're looking to pay a personal loan off faster.

1. Make Biweekly Payments

This is a popular strategy, and it involves splitting your monthly loan payment into two half-payments every two weeks. It usually allows less interest to accrue and results in one extra full payment per year, helping you get out of debt faster.

2. Round Up Monthly Payments

Add a small amount to each monthly payment by rounding up to the nearest hundred dollars.

Say you're making a $250 monthly payment on a $10,000 loan at an 11.66% interest rate. You'd pay back the loan, along with $2,723 in interest, over 51 months.

However, if you add an extra $50 to each monthly payment, you'd pay off the loan in 41 months, resulting in a total interest cost of $2,143.

3. Make Extra Payments

If you can't or don't want to commit to a more aggressive payment schedule, you can simply make extra payments as you can afford them. Even a little extra can go a long way.

Consider dividing your monthly balance by 12 and spreading that cost across all your payments that year as a starting point.

4. Use Windfalls

Put unexpected financial gains toward your loan's principal. A windfall could be your tax refund, annual or quarterly work bonuses, prize or gift monies, an inheritance or investment profits.

5. Refinance to a Shorter Term

Refinancing can help you get rid of the debt more quickly. However, your monthly payment is likely to increase.

Plus, while short-term loans often have lower annual percentage rates (APRs) than long-term loans, there's no guarantee you might not qualify for a similar or lower one.

Check for Prepayment Penalties

Some lenders charge a prepayment penalty on a personal loan if you pay back the funds before the term officially ends. These prepayment penalties enable the lender to recoup lost interest.

They can be either:

• Flat fee

• Interest-based

• A percentage of the remaining balance, typically ranging between 1% to 5%

As a result, consider these penalties before initiating an early payoff. Lenders have to disclose prepayment penalties, so review your loan agreement to see if and what you might owe.

Look for terms like these when reviewing the terms and conditions:

• Prepayment fee

• Prepayment penalty

• Early payment fee

• Early payoff clause

How To Automate Your Payoff Plan

You can reduce the legwork associated with paying a loan off early by taking the following steps:

• Set up biweekly auto-payments. Some lenders allow you to do this through their app or your online account.

• Increase the fixed amount on each scheduled payment if you've decided to pay more than the minimum each month. Some lenders don't allow this, but instead allow for additional payments manually to pay off your loan faster.

• Request principal-only payments. The lender might apply extra payments to future interest, negating some of the benefits of an early payoff. Not all lenders offer principal-only payments, though, and even those that do may require you to notify them each time you want to make one.

• Use a budgeting or payoff tracker app. Apps such as YNAB often have extra autopay features, budgeting tools and payment plan recommendations that can help you with an early loan payoff. They may charge a subscription fee, though.

Should You Pay Off a Loan Early or Invest That Money?

You'll need to compare your loan's APR against your potential investment returns to determine the best use of your money.

Generally speaking, you'll want to prioritize paying high-interest debts, typically those carrying an APR of 8% or higher, as their costs tend to outweigh the returns on most investments.

According to research from JPMorgan Wealth Management, the average annual stock market return rate runs between 6% to 7% once you account for inflation.

Keep in mind, you'll want to account for your risk tolerance and level of savings when deciding how to allocate extra funds in your budget.

When It Might Not Make Sense To Pay off a Loan Early

While less debt certainly sounds good, an early loan payoff isn't always your best move. Here are some scenarios where you may want to adhere to the loan's original terms and conditions.

• Your loan has a hefty prepayment penalty. An exorbitant prepayment penalty could negate all or more of your interest savings.

• You have other higher-interest debts, in which case using extra funds on a low-interest balance will cost you more money in the long run.

• You don't currently have an emergency fund. It's generally recommended to have at least one to six months' worth of expenses banked in a high-yield savings account, so you're financially prepared for emergencies.

• You're nearing the end of the loan with little interest remaining. In this scenario, you may not need to sacrifice any cash flow or could benefit from directing those funds into an investment account instead.

• Prepaying the loan could hurt or blunt your credit. If you have few or no other open credit accounts, you might want to pay the loan as originally agreed to build your credit mix and establish a longer payment history.

Paying off your loan early can be a smart strategy, but be sure you're carefully weighing the pros against any cons. Chipping away at even a portion of your loan's balance is one step closer to better finances.

FAQs

What are the benefits of paying off a personal loan early?

Paying off a personal loan can save you on interest. Other benefits include fewer monthly payments, extra funds, a lower debt-to-income ratio and potential positive effects on your credit score.

Can I pay off a personal loan early without penalty?

You can pay a personal loan early without a penalty if your loan agreement doesn't include an early payoff clause or prepayment fee.

Will it hurt my credit score?

Paying off a loan early could hurt your credit score as credit scoring models weigh closed accounts less heavily than open ones. Depending on your credit profile, the move can also negatively affect your credit mix. However, these decreases are often small and temporary.

Does it really save money on interest?

Paying a personal loan back early can save you on interest as extra payments lower the loan's principal, the amount on which interest accrues.

Can I pay a lump sum instead of monthly payments?

You can pay a personal loan off with a lump sum payment. However, you may incur a prepayment penalty if you do so.

Sources:

• Federal Reserve Bank of St. Louis. "Commercial Bank Interest Rate on 24-Month Personal Loans, Nonrevolving."

• J.P. Morgan Wealth Management. 2025. "What is the average stock market return?"