The Pros and Cons of Paying Off a Personal Loan Early (2024)

Wondering if you can pay off a personal loan early? The good news is yes, usually you can. If you receive a cash windfall, using the money to clear debt ahead of schedule can save on interest. And your credit score may improve as you lower the amount of debt you’re carrying relative to your income. However, check the terms of your loan to see if it includes a prepayment penalty. And if you’re trying to build your credit history and the interest rate is not very high, consider putting that cash into a dedicated high-yield savings account and making those payments automatic to continue to build your credit history.

Let’s take a closer look at the advantages and disadvantages and what else you need to know if you’re thinking about paying off a personal loan early.

Pros of Paying Off a Personal Loan Early

Reducing debt and keeping it at a manageable level are important factors in achieving and maintaining good credit, as well as strengthening your financial situation. Paying off a personal loan early does all that and more.

1. Save money on interest.

The faster you can pay off a loan, the less it will cost you in interest. If you can pay off a personal loan early, it can lower your total cost of borrowing, potentially saving you a considerable amount of money.

For example, let’s say you’ve already repaid $10,000 on a $30,000 personal loan with an interest rate of 10% and three years left on your term. If you paid off the remaining $20,000 balance early in one lump sum, you’d save an estimated $6,000 in interest over the remaining term of the loan.

2. More money in your monthly budget.

If you can pay off your personal loan early, you’ll no longer have that monthly recurring payment hanging over your head, which means you can use those extra dollars in other ways. You could earmark that amount for daily expenses or apply it toward important financial goals like building an emergency fund or saving for retirement.

3. Lower your debt-to-income ratio.

Your debt-to-income ratio (the sum of your debts divided by your income) is a key metric lenders use to decide whether to extend credit. By lowering your debt-to-income ratio, it may have a positive impact on your credit score and help you qualify for more favorable loan terms and rates in the future.

4. Gain peace of mind.

The sooner you can pay off a personal loan the sooner you’ll be free of that debt.
One less financial obligation to worry about can reduce your monthly and weekly financial pressure. If you do pay off your personal loan early, make sure doing so won’t cause other financial burdens. For example, be sure you’re currently able to pay your other regular monthly bills on time and that you have at least three to six months of living expenses stashed in an emergency savings account. It’s best not to use the money in your emergency savings or retirement accounts to pay off a personal loan early as these accounts provide essential peace of mind and are there to support you in the future.

Cons of Paying Off a Personal Loan Early

While paying off a personal loan early can save on the cost of borrowing and trim your debt load, depending on your situation there are also some possible disadvantages.

1. You might get hit with a prepayment penalty.

Some lenders include a prepayment penalty clause in loan contracts to recoup the interest they would miss out on if the loan is repaid ahead of the scheduled loan maturity date. This amount is usually set as a percentage of the unpaid principal loan balance at the time of payoff.

Check your loan documents carefully and do the math before making your decision. Though you’ll save on interest, a prepayment penalty could partially or entirely wash away those savings, especially if your loan already has a low, fixed interest rate or a shorter term.

If you think you’ll be paying off a personal loan early before agreeing to the terms of any loan, try to find a lender that doesn’t charge a prepayment penalty. For example, LendingClub Bank doesn’t charge any prepayment fees or penalties, so you can pay off your loan early and reap the full benefits of any interest savings you may have earned.

2. It could impact your credit score.

It may seem counterintuitive, however, paying off a personal loan early could temporarily have a negative impact on your credit score.

For example, payment history is one of the biggest factors in determining your credit score and having a solid record of on-time, monthly payments can be beneficial for your finances in the long term. A personal loan appears on your credit report as an installment loan account, which includes the specific loan amount and repayment schedule. So, if you’re still in the process of building or repairing your credit scores, paying off a personal loan early means you could potentially lose out on months (or even years) of demonstrating a positive payment history.

The age of your credit accounts and whether you have a good mix of different types of credit can also affect your credit score. Considering these key measures, paying off a personal loan early may cause a temporary dip in your credit score. This is because when you pay off a personal loan, your lender will report the payoff and stop sending the credit agencies monthly updates about your account. If the loan was your only installment account, it could negatively impact your credit score because you might now have a less diverse mix of credit accounts. However, if you made on-time payments and your account was in good standing when you closed it, the drop in your score will only be temporary. On the other hand, if you missed payments, it may have a longer-lasting negative impact.

3. You may have better ways to allocate that money.

If the interest rate on your personal loan is lower than the rates you’re paying for other types of debt, the money you’ve earmarked for debt payoff may be better spent elsewhere. Instead of paying off your personal loan early, you could focus instead on paying off higher-interest debt first, such as credit card balances, which could save you more in the long run. You could also consider building up your retirement plan contribution at work to be eligible for an employer match or putting that money into a high-yield savings account.

And of course, before making changes to your monthly contributions or paying off a personal loan early, check your bank accounts and make sure you have the funds to cover both your anticipated monthly expenses and unexpected emergencies.

Does LendingClub Bank Charge Prepayment Penalties or Fees?

Personal loan rates, fees, and terms vary widely by lender. That’s why it’s always important to study the details of your offer so you don’t end up paying more than necessary, or more than you can reasonably afford given your budget.

At LendingClub, you can pay off your personal loan early or pay more than your contractual monthly amount at any time with no prepayment penalty or fee. Any payments you make on top of your regular monthly payment are applied toward reducing the principal balance of your loan. This flexibility allows you to reduce the amount of interest you’ll pay overall without worrying about hidden fees.

The Bottom Line

Whether to pay off your personal loan early depends a lot on the lender. Before deciding, consider all the potential fees and weigh the pros and cons to compare what you may gain in the short-term against your other financial goals. If you’re able to plan for paying off a personal loan early before taking out the loan, choose a lender who won’t penalize you for prepayment.

FAQs About Paying Off a Personal Loan Early

1. If I pay off a personal loan early, will I pay less interest?

Yes. By paying off your personal loans early you’re bringing an end to monthly payments, which means no more interest charges. Less interest equals money saved.

2. What is a prepayment penalty and why do they exist?

A prepayment penalty is a fee that some lenders charge when borrowers pay off all or part of a loan before the term of the loan agreement ends. Prepayment penalties discourage the borrower from paying off a loan ahead of schedule (which would otherwise cause the lender to earn less in interest income). The best way to avoid a prepayment penalty is to work with a lender that doesn’t charge one. At LendingClub, for example, you can make extra payments or pay off your personal loan in full at any time with no additional charges.

3. Will paying off my personal loan early affect my credit score?

It depends. Paying off your personal loan early can affect your credit mix, credit utilization, and credit history and, depending your personal financial situation, it may or may not affect your credit score. You may experience a temporary drop in your credit score if paying off your personal loan impacts any one of these credit scoring factors. Continuing to make payments on a lower interest rate installment loan (such as a personal loan) could help your credit score by boosting your history of on-time payments.*

*Reducing debt and maintaining low credit balances may contribute to an improvement in your credit score, but results are not guaranteed. Individual results vary based on multiple factors, including but not limited to payment history and credit utilization.

You May Also Like

Related Resource Center

Understanding the 5 Cs of Credit

When you apply for a loan or credit card, many lenders may use the 5 Cs of credit—character, capacity, collateral, capital, and conditions—to determine your eligibility and the terms of your financing agreement. The 5 Cs of credit are measures of how you handle your current credit obligations and your ability to repay a loan. Understanding how each of these factors impacts a lender’s decision-making can potentially increase your odds of getting approved and scoring more favorable rates and terms.

Personal Loan

Feb 5, 2023

6 min read

How to Improve Your Credit Score

Credit scores are three digit numbers ranging from 350 to 850 calculated from credit bureau reported data that represent a snapshot of your credit health and history. A high credit score is an indicator to potential creditors there’s a higher probability you’ll repay your debt. Lenders generally offer lower interest rates on personal loans, lines of credit, auto refinance loans, and home mortgages to borrowers they believe are most likely to pay them back—typically those with credit scores in the Very Good to Excellent (about 760-850) range.

Personal Loan

Nov 3, 2022

7 min read

How Many Times Can You Consolidate Debt?

Using fixed, low-interest credit to refinance variable, high-interest credit card balances can be a smart financial move. This practice, known as debt consolidation, can simplify your monthly finances, make your payments more predictable, and save you money on the cost of borrowing. If you’ve consolidated debt with a personal loan once and liked the results, you may be wondering if you should get a second (or a third) debt consolidation loan. Here’s what you need to know about obtaining multiple debt consolidation loans.

How to Apply for a Joint Personal Loan

There are many reasons to consider a joint personal loan, including sharing the payment obligations, securing better financing terms, and improving your odds of approval. So, if your credit history is holding you back from getting favorable interest rates and terms on your own, having a co-borrower could help you qualify for apersonal loan.

Personal Loan

Oct 11, 2022

5 min read

When and How to Refinance a Personal Loan

A personal loan refinance involves taking out a new loan and using that money to pay off your existing debt. You can sometimes do this directly with your original lender, or you may want to work with a new lender.

Personal Loan

May 24, 2022

7 min read

Related Impact

Members Earn More Cash Back and Rewards With Stackit

From groceries and diapers to Halloween costumes for pets, nearly 60% of American consumers prefer to shop online for everyday items that make life more convenient, comfortable, and enjoyable. And with rising prices showing no signs of stopping anytime soon, we’re pleased to introduce StackitTM from LendingClub Bank—a new browser extension that automatically finds and rewards eligible members with coupons and cash back for extra savings at more than 15,000 favorite online retailers.

Company News

Nov 13, 2022

2 min read

LendingClub Rewards Checking Nationally Certified as Trusted, Affordable

Even in today’s low-yield, high-inflation environment, it’s essential to keep a certain amount of money in an easy-to-access checking or savings account for things like daily household and emergency expenses, or to meet short-term financial goals.

Company News

Oct 2, 2022

5 min read

LendingClub Surpasses 4 Million Members

Since 2007, LendingClub has been on a mission to deliver a world-class experience to all our members. This month we took a moment to reflect on the more than four millionmembers who have chosen LendingClub as their partner to help them reach their financial goals.

Company News

Apr 19, 2022

2 min read

LendingClub Celebrates One Year as a Digital Marketplace Bank

In March 2022, we hosted our first quarterly webinar where we celebrated our one-year anniversary as a digital marketplace bank.

Company News

Mar 6, 2022

less than a minute read

Changes to Our Business Model

LendingClub completed the acquisition of Radius Bank in February 2021. At that time, in addition to the direct-to-consumerdepositbusiness, we inherited a fintech partner program,andseveral lendingbusinesses.As we reach the one-year anniversary of the acquisition, and in conjunction with the conclusion of a strategic review of our business operations, we have made the decision to discontinuecertain businesses that don’t fit our mission.

Company News

Jan 2, 2022

2 min read

Related FAQ's

How Do I Qualify for a Personal Loan?

To qualify for a lending productwithLendingClubBank, you must...

Personal Loan FAQ

Jun 7, 2023

less than a minute read

How Long Does It Take to Get Approved for a Loan?

Our process is fast—most members are approved within a few hours.The exact turnaround time you’ll see foryourapplication will depend on your unique details.

Personal Loan FAQ

Jun 7, 2023

less than a minute read

Should I Get a Balance Transfer Loan?

It depends on how you plan to use your loan.

Personal Loan FAQ

Jun 7, 2023

2 min read

What Are the Rates, Fees, and Interest for Personal Loans?

Your annual percentage rate (APR) is the overall yearly cost of your loan, including fees and interest. The APR on LendingClub Bank loans ranges from 6.34% to 35.89%.

Personal Loan FAQ

Jun 7, 2023

less than a minute read

How Do I Pay off My Loan?

If you're ready to pay off your loan, congratulations! That’s a big financial step.

Personal Loan FAQ

Jun 7, 2023

less than a minute read

Related Glossary

Revolving Credit

{noun} A type of credit that allows the borrower to make charges and payments against a set borrowing limit, paying interest only on outstanding balances.

R Letter Term

Sep 6, 2023

4 min read

Accrued Interest

{noun} The amount of unpaid interest that has accumulated as of a specific date, either on a loan or an interest-bearing account or investment.

A Letter Term

Mar 21, 2023

4 min read

Annual Percentage Rate (APR)

{noun} The total annual cost to borrow money, including fees, expressed as a percentage.

A Letter Term

Mar 21, 2023

3 min read

Charge-Off

A debt that is written off as a loss because the financial institution or creditor believes it is no longer collectible due to a substantial period of nonpayment.

C Letter Term

Feb 7, 2023

3 min read

Fixed Interest Rate

{noun} An interest rate that remains the same for a set time, usually for the life of the loan.

F Letter Term

Feb 4, 2023

3 min read

The Pros and Cons of Paying Off a Personal Loan Early (2024)
Top Articles
Latest Posts
Article information

Author: Stevie Stamm

Last Updated:

Views: 6225

Rating: 5 / 5 (60 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Stevie Stamm

Birthday: 1996-06-22

Address: Apt. 419 4200 Sipes Estate, East Delmerview, WY 05617

Phone: +342332224300

Job: Future Advertising Analyst

Hobby: Leather crafting, Puzzles, Leather crafting, scrapbook, Urban exploration, Cabaret, Skateboarding

Introduction: My name is Stevie Stamm, I am a colorful, sparkling, splendid, vast, open, hilarious, tender person who loves writing and wants to share my knowledge and understanding with you.