Should I Pay Off My Personal Loan Early?
Having debt hanging over your head can be nerve-racking. Loans are typically paid off in fixed amounts on a schedule, but if you’ve been budgeting and have the means to pay off your personal loan early, should you? Though it may seem like a no-brainer, there are a few factors to think about, such as your other financial obligations, potential penalties, and the impact on your credit score.
Impact on Credit Score
If you’re paying off your personal loan early in hopes of boosting your credit score, you may be disappointed. Where maintaining a positive history of on-time loan payments builds your credit score, paying off a personal loan early closes your account and can reduce your account diversity. This can sometimes result in a minor drop in your credit score.1
Though this drop is often temporary, you may want to delay paying off your loan completely if you need your best credit score right now. For instance, if you’re in the process of renting a new apartment or getting a mortgage, you may consider holding off.2 If you’re concerned about your credit score, consider getting a credit score check before you decide to pay off your loan.
Reducing Interest Rates
Personal loans typically carry high interest rates, so a big benefit of paying off your loan early is reducing those interest costs.3 Paying off your loan can also lower your debt-to-income (DTI) ratio, which makes you more attractive to lenders for future loans.4 The DTI percentage is the sum of all your monthly debts divided by your monthly income.
Consider the Penalty
Some lending institutions have prepayment penalties, which means you’d owe a fee for paying off your loan early.3 Some lenders will put prepayment penalties in place to safeguard against the interest revenue they lose when you pay off your loan ahead of schedule. Check your original loan agreement to make sure you won’t owe a fee should you choose to pay off your loan early.
Weigh Your Options
The relief of paying off your loan can give you peace of mind and the reassurance that even if your circumstances change in the future, you won’t have to stress about your loan payments. On the other hand, if you spend all your money paying back your loan early and then get hit with unexpected expenses like car troubles or hospital bills, you may end up right back where you started: in need of a loan. Before paying off your personal loan, it’s advisable to start saving money by building up an emergency fund with three to six months of living expenses.4 You can learn more about how to build up an emergency fund by checking out our blog – 5 Ways to Start an Emergency Savings.
You may also want to weigh your options if you have other debts, such as unpaid credit cards or other loans. Will paying down debt be more beneficial right now than paying off your loan? You might gain more from investing the money or contributing to your retirement fund so weigh your choices carefully.1
Online Payday Loans
In the end, the decision to pay off your personal loan early comes down to your financial priorities. Once you consider all the factors, focusing on paying down debt or budgeting for unexpected expenses might make more sense for your situation.
At LendNation, you can get a cash quick, even with less-than-perfect credit, with an installment loan, payday loan, or title loan. We’re determined to help you get money when you need it most. You can easily apply online or stop by one of our many locations for help while you continue to successfully build your credit score and secure a strong financial future.