Rest assured that if you have personal loan debt, you are not alone. It’s estimated that nearly 22 million Americans are also struggling with personal loan debt.
While knowing you’re not alone in your debt might help you feel normal, making the payments every month is probably not fun. But getting out of debt fast is a common and realistic goal for many. So let’s explore how and why someone would want to pay off their personal loans quickly.
Benefits of paying off a personal loan faster
Paying off your loan faster than outlined in your terms has its benefits.
Save on interest
Interest quickly becomes an added expense to your loan. Paying your loan off early can save you on interest per year. Say you have a $10,000 loan with a 10% interest rate — that’s $1,000 in interest. Have a five-year term? An extra $5,000. Paying this loan off early can save you money over time.
Lower debt-to-income ratio
Your debt-to-income ratio looks at your monthly income compared to how much you owe monthly. While this does not directly impact your credit score, it is taken into account when you’re applying for a loan, specifically for a mortgage. Paying off your loan faster decreases your debt, which will lower your debt-to-income ratio, and a lower debt-to-income ratio is what you want.
More room in your monthly budget
As your monthly payment declines, you free up more money. If your loan was expected to be paid off in five years but you pay it off in three, you free up some funds. Imagine if your loan payment were $500 a month. Freeing up $500 sooner than expected can really change your monthly budget.
9 best ways to pay off a personal loan faster
Does paying off your loan faster seem more appealing now? Here are some tips on paying off your debt faster.
Check for prepayment penalties
First, check for prepayment penalties. A prepayment penalty is a fee your lender charges for paying off your loan earlier than the terms you agreed to at the time of signing. The details of the prepayment penalty, such as the fee and circumstances associated with it, are discussed at the loan signing, so you are aware of this information ahead of time. In some cases, it’s better to pay the prepayment penalty than continue to make payments on the loan. Find out the details and see what works best for you if your loan has one.
Shorten the length of your personal loan
Instead of choosing a 60-month loan, consider a 24-month loan to pay it off faster. A shorter loan length means you pay less interest and save money, but it also means a higher monthly payment. Keep that in mind when agreeing to shorter terms.
Make extra payments toward your personal loan
Making extra payments toward your personal loan is a great way to get out of debt fast while also giving yourself a grace period if you do not have extra funds that month. For example, if your monthly payment is $500, try making an additional payment each month, even if it is only an extra $25. At the end of the year, that extra $25 equals an extra $300. Not bad!
Round up your personal loan payment
Rounding up your payment is a simple way to ensure you make extra payments toward your loan while not breaking the bank. If your monthly loan payment is $250, for example, consider rounding your payment to $300 monthly. Feel like too much? Consider rounding up to $260 if you can afford it. Every little bit helps when it comes to making extra payments.
Take on a debt repayment strategy
Many people use the snowball or avalanche strategies to successfully get out of debt fast.
The snowball method is when you focus on the smallest debts first. Keep making minimum payments on your larger debts while focusing your extra payments on your smaller debts. Once that debt is paid off, move on to the next smallest. Many enjoy this strategy because paying off smaller debt first means you get those little successes sooner, making it easier to feel accomplished.
The avalanche method is the opposite. With this method, you first focus on the larger debts or the debt with the highest interest, paying the minimum balance on your smaller debts. Once the largest or higher-interest debts are paid, you move on to the next-highest debt. While it might take a little more time to pay off debts and notice a change using this method, it does yield significant benefits once that larger debt is paid off.
Consider refinancing your personal loan
You can refinance a loan, which could lower your monthly payments, get you a lower interest rate or shorten your loan terms — all ways to help you get out of debt fast. Refinancing only makes sense if it enables you to save money or pay off your loan sooner.
But refinancing requires another credit check, and there could be fees. There also could be a prepayment penalty for your existing loan and fees for opening a new loan. You also may not get a better interest rate than what you already have. It’s best to consider other options before applying for refinancing.
Make biweekly payments on your personal loan
While it might seem too simple, making biweekly payments on your loan can add up to an extra payment a year. All you have to do is split your monthly payment in half and make that payment every two weeks. For example, if your monthly payment is $100, you would make two $50 payments per month. This helps you make payments more often so that fewer interest accrues and shortens the length of the loan.
Find ways to save money
Reallocating your funds is another excellent way to pay off debt. Find ways to save money in other areas and use that money to pay your loan. Saving money might mean cutting out that morning coffee or at least cutting back. It could mean reviewing your budget and removing all those streaming services. Wherever you can make realistic cuts, try it and use that money toward your loan. Every little bit counts, so even $20 makes a difference.
Consider a side hustle
A side hustle can guarantee you extra cash. Bringing home extra money means making additional payments and paying off your loan faster. Consider a job such as driving for a ride-share or food-delivery company that allows you to pick your own hours. Many jobs such as freelance positions don’t even require you to leave home.
Pay off debt faster — if you can
Having a personal loan is an additional debt. After a few months or years of making payments, you might want to get rid of the loan as fast as you can. You might yearn to pay it off quickly, and while there are options to handle this, you want to make sure paying off your loan faster does not put you in a different financial challenge. You can make more payments, pick up additional work or refinance the loan. Whatever option you choose, make sure you do what’s best for you and your finances.
Is it worth paying off a personal loan early?
Paying off your personal loan early is worth it because it saves you money on interest and frees up your funds. Consider any fees associated with paying off your loan early before deciding to make the leap.
Can I repay the full amount immediately after taking out the personal loan?
Paying the total amount of your personal loan immediately is usually allowed. Just make sure there are no prepayment penalties or find out how much they are. Paying the loan off too soon might not be worth it after the fees.
Is it better to pay off personal loans fast or slowly?
Paying your loan off fast can help save you money, so in most cases, it is better to pay your loan off fast if you can afford it.