So, a lender approved you for a personal loan. What's next? You have the cash now but have to start making payments. Luckily, repayment doesn't have to last forever. Why continue to live in debt when you can create a plan to pay back the money you owe now?

Should You Pay Off Your Loan Early?

Paying off a personal loan early can be advantageous in certain circumstances. However, it's essential to consider the potential drawbacks.

It may be more beneficial to prioritize paying off higher-interest debt before focusing on personal loan repayment to save more on total interest. One possible financial goal is to pay down credit card debt quickly due to the high-interest annual percentage rates that can accumulate and increase your debt.

In August 2023, the Federal Reserve reported that the average interest rate for a 24-month personal loan was 12.17%, while for a credit card it was 21.19%.

If you have a personal loan with a higher interest rate than your other debt, paying it off early can save you money on interest and decrease your overall debt. Improving your credit history and score can help you increase available funds in your budget.

Auto and student loan debt usually have lower interest rates than personal loans, which may result in greater returns when paying off your mortgage early.

Before deciding to repay a personal loan beforehand, it's essential to assess the financial implications carefully. For example, one may need to reduce expenses to make additional monthly payments toward the principal balance. Please ensure that making extra loan payments aligns with your budget. It is important to consider any potential prepayment penalties and whether the savings in interest will outweigh them.

Steps You Should Take to Pay Off Your Loan Quickly

We want to assist you in taking a more meaningful approach to money. Here are some tips to help you keep the loan repayment process stress-free.

Track Where Your Money Goes

You control your money — it doesn't control you. Tracking your spending is the number one technique to help you keep your finances in order. Knowing where your money goes each month will help you feel more empowered. It will also make you more inclined to reduce your spending.

You can track where your money goes with these methods:

• Take some time to look through old receipts to see where you can cut back. Most people find that they should spend less at restaurants, bars, salons, or department stores.
• Make a budget. You can do this on paper, in an Excel spreadsheet, with budgeting software, or through a budgeting app on your phone. Choose a method that works best for your lifestyle.

Track every expense for at least 30 days, and you'll be better positioned to create the ultimate saving strategy! You'll see how much you're putting toward loans and find ways to cut back in other areas to contribute extra money to repayment.

Break Down Your Personal Loan Payments

Splitting your monthly loan payment into two biweekly payments is possible without prepayment penalties. This method is effective for reducing debt quickly.

Breaking down your payments this way will result in an extra annual payment, accelerating the payoff schedule. This method helps decrease the total interest paid and shorten the loan term by dividing the monthly payment into two and increasing each payment slightly.

If your monthly minimum payment is $400, consider making payments of $200 each month and allocating an additional $40 monthly toward your principal balance. By staying ahead and paying off your loan early, you can still receive the credit benefits of making regular payments.

One option to consider is breaking down loan payments into smaller biweekly payments, especially if you receive biweekly paychecks and want to pay off debt faster without depleting your funds. It is advisable to consult with your personal loan lender before making this change, as they may have differing repayment plans or potential prepayment penalties.

Make Extra Payments

If you cannot increase your monthly payments, consider making occasional extra payments to reduce your debt.

It is essential to consider utilizing the additional income from holidays, birthdays, bonuses, and other sources of extra savings throughout the year. One way to increase your budget for loan payments is by reducing dining-out expenses, even if it means skipping them once a month. This method involves making minor changes to your habits to allocate more funds towards loan payments.

It is recommended that you only do so if you have enough savings. A survey found 44 percent of U.S. adults could cover a $1,000 emergency expense using savings. If you are in that situation, concentrating on paying the monthly minimum may be the most beneficial course of action. Maintaining a good credit mix and score will help you while you focus on building your savings.

If you have extra savings and want to repay your loan, making a principal-only payment can be beneficial. Making a principal-only payment helps reduce your outstanding balance and save more on monthly interest. To make this payment, please contact your lender and specify that you want the additional fee to be applied to the principal balance.

Start a Side Hustle and Use Additional Income

You may need to increase your income if you're cutting down your spending and still not seeing the desired results. The good news is that some side gigs only require a little time, and you receive added security with a few hundred dollars more a month. The additional income will knock down interest and principal costs, helping you to pay off loans quickly.

Here are a few examples of side hustles:

• Sell clothing or handmade crafts online
• Offer a service (tutoring, writing, website design, photography, renting a room in your house, etc.)
• Work odd jobs here and there (dog-sitting, house-sitting, etc.)
• Start a side business

If you receive a raise, a bonus, or a tax refund, don't spend it all on material items or exotic getaways — put this extra money toward your loan. You don't have to dedicate everything toward repayment, but any additional income always helps.

Tackle Debts Strategically

Only have one loan at a time. For example, if you know you will apply for a home loan, pay off your student debt before doing so. However, in almost every situation, it's crucial to tackle high-interest debt first and foremost.

Credit card interest is very high, so you must avoid being stuck with that brutal interest for too long. It just snowballs into more money and more problems later. If you're currently repaying more than one loan, focus on one at a time. This can make repayment less overwhelming and help you move through the rest of your loans.

Also, be aware of the interest on your loans. When money sits for too long, the interest continues to pile up. Therefore, it's generally better to knock out what you owe early.

It would help if you weren't afraid to get a loan — make sure you make payments on time. Loan repayment is a big commitment, but it doesn't have to be a grueling process. With these tips, you can move your payoff date farther from the future and closer to the present. This will ease financial pressure, and soon, you'll be able to spend your money on things other than a loan.

Live Minimally

We often spend money we don't have and buy things we don't need. Five pairs of jeans never seem like enough. Two bedsheet sets are not enough. But what you already have is enough. Materialistic goods can only make you happy for a moment. Still, the natural relief (and long-lasting happiness) will come when you no longer owe money to lenders.

Adopting a minimalistic lifestyle helps keep extra cash in your pocket for payments. It gives you more cash for your life post-repayment.

If you're passionate about living a more frugal life, we have some simple saving tips you can make today. You may even grow to like these changes!

Make Sure You Have an Emergency Fund

Unfortunately, constant spending doesn't help you get any closer to saving. Thinking about something other than an emergency fund now can derail your savings progress later. You'll dip into your regular income if you don't save money for emergencies.

With an emergency fund, you'll feel encouraged when you can fork over the money should something terrible happen. Only 39% of Americans have enough saved to cover a $1,000 emergency.

Whether it's a medical bill, a totaled car, or a broken appliance, you must ensure you can afford the unexpected. Even if you don't think you can afford to put money into savings, if there's a will, there's a way. We recommend you keep about six months of living expenses in savings—this will give you a nice safety net that provides enough comfort.

Refinance Your Loan

One way to reduce the length of your loan is through refinancing. There are options to refinance a single loan or consolidate multiple loans into one with a debt consolidation loan.

Refinancing involves transferring existing debt to a new loan with more favorable terms, such as a lower interest rate or different repayment schedule. Refinancing a loan can reduce monthly payments and help pay off debt more quickly.

Refinancing a loan may only be suitable for some situations. Consider refinancing your loan if you can obtain a lower interest rate on the new loan or if you require an extension on your repayment term. If your credit score has increased, refinancing may be an excellent option to secure lower interest rates.

Refinancing your loan at a lower interest rate can reduce your monthly payments and repay the loan sooner. It also allows for the option to select a shorter repayment period, reducing the overall duration of the loan.

It is essential to review your lender's terms carefully before refinancing. If you are close to paying off your loan or if the interest rate on a refinanced loan would be higher, it may not be a beneficial option. Be sure to consider any fees that may be involved.

Pros and Cons of Paying Off Your Personal Loan Early

Managing debt effectively is crucial for maintaining good credit and improving your financial stability. Paying off a personal loan early has various benefits.

Save Money on Interest

Paying off a loan quickly can reduce the amount of interest you will pay. Paying off a personal loan early can reduce your total borrowing cost and save you a significant amount of money.

For example, if you have paid back $10,000 of a $30,000 loan with a 10% interest rate and three years remaining on the term, By paying off the remaining $20,000 personal loan balance early in one lump sum, an estimated $6,000 in interest would be saved over the remaining term of the loan.

More Money in Your Monthly Budget

Paying off your personal loan early can eliminate the monthly payment burden, allowing you to allocate those funds elsewhere. The amount could be allocated for daily expenses or saved for important financial goals, such as building an emergency fund or saving for retirement.

Lower your debt-to-income ratio

The debt-to-income ratio is a crucial metric that lenders consider when determining creditworthiness. Decreasing your debt-to-income ratio can potentially improve your credit score and make it easier to qualify for better loan terms and rates down the line.

Gain Peace of Mind

Paying off a personal loan sooner can help alleviate financial stress by reducing your monthly and weekly obligations. Before paying off your loan early, ensure it won't lead to additional financial difficulties. Ensuring you can pay your monthly bills on time and have enough savings to cover three to six months of living expenses in emergencies is essential. It is recommended not to use funds from your emergency savings or retirement accounts to pay off a personal loan early, as these funds serve as a safety net and are essential for future financial security.

Cons of Paying Off a Personal Loan Early

There are potential benefits to paying off a personal loan early, such as saving on interest and reducing overall debt. However, there may also be drawbacks depending on your circumstances.

Beware of Prepayment Penalties

Specific lenders may include a prepayment penalty clause in loan contracts to compensate for potential lost interest if the loan is paid off before the scheduled maturity date. The amount is typically calculated as a percentage of the remaining balance when the loan is paid off.

Review your loan documents thoroughly and consider the financial implications before deciding. While prepayment can save on interest, borrowers should be aware that a prepayment penalty may negate those savings, especially if the loan already has a low, fixed interest rate or a shorter term.

Before accepting the terms of any personal loan, consider finding a lender that does not charge a prepayment penalty if you plan on paying off the loan early. An example of a lender that does not charge prepayment fees or penalties is CASH 1 Loans, allowing borrowers to pay off their loans early without incurring any extra costs.

It Could Impact Your Credit Score

While it may seem counterintuitive, paying off a personal loan early could have a temporary negative impact on your credit score.

For example, payment history is one of the most significant factors in determining your credit score. Having a solid record of on-time, monthly payments can benefit 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 building or repairing your credit scores, paying off a personal loan early means you could 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 critical measures, paying off a personal loan early may cause a temporary dip in your credit score. 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 miss payments, it may have a longer-lasting negative impact.

There May Be More Effective Ways to Use That Money

Suppose the interest rate on your loan is lower than the rates on other types of debt. In that case, focusing on paying off higher-interest debt may be better. This could include credit card balances, saving you more money in the long term. Consider increasing your retirement plan contributions to qualify for an employer match or putting the money into a high-yield savings account. Before making any changes, ensure you have enough funds to cover your monthly expenses and emergencies.

The CASH 1 Conclusion

The decision to pay off your loan early may be influenced by the terms set forth by the lender. When deciding, it's essential to carefully consider all potential fees and weigh the pros and cons to compare short-term gains against your other financial goals. When considering paying off a personal loan early, opt for a lender that does not charge a prepayment penalty.