Can you pay off a personal loan early?

It’s generally possible to repay a personal loan early. However, some lenders may charge a fee for exiting the loan before the term ends. It’s important to read the specific terms and conditions of your loan to understand if any fees apply for early repayment and whether any other conditions might affect your decision.

Calculating potential interest savings and comparing them with the estimated costs can help determine if this option aligns with your financial goals.

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Paying off the remainder of a debt can be a satisfying feat but is it always the right choice? Well, it depends.

The answer boils down to your specific personal loan’s features and terms and conditions. Some personal loan products allow for unlimited extra repayments and don’t charge an early exit fee for paying off your debt early, while others may be less flexible.

You could find that your personal loan provider may waive the early exit fee in the final year of the loan term, but if you pay your loan off any earlier, you’ll have to cop the charge.

The main reason for this is because if you pay your loan off early, your lender may be losing out on interest repayments that you would have otherwise made on the outstanding amount. So, they charge a fee to make up for this.

In some instances, you may decide that even though you may be faced with an early exit charge, it’s still worth it to you to pay your loan off ahead of time. This may depend on how much the charge is compared to how much interest you would have paid. Just ensure you do the calculations before biting the bullet.

To find out how much you may be charged for exiting your loan early, consider contacting your lender directly.

If you’ve decided that paying off your personal loan early is a viable option for you, you may be wondering how to go about it. You can generally pay off your personal loan early in one (or a combination) of three ways:

1. Pay more than your standard repayment

If it fits comfortably into your household budget, you could consider routinely paying a little extra each time you make a loan repayment. Even if it’s only a small amount, it will add up over the life of the loan and likely see you paying it off early.

However, it’s worth checking to see if you’ll be charged for paying more than the required amount before you go ahead and do so.

2. Make extra repayments

If you’ve come into some extra money, perhaps from a tax return or a bonus at work, you could consider making a one-off lump sum repayment on your personal loan. But again, check with your lender to see if your loan agreement allows for this without being stung by a penalty fee.

3. Change your repayment frequency

If you’re currently making your repayments on a monthly basis, you could consider switching to fortnightly repayments to potentially pay your loan off sooner. The way this works is that when you pay fortnightly, you’re making 26 repayments a year, or the equivalent to 13 months of repayments in many cases.

This method could be particularly appealing if you’re on a fortnightly pay cycle.

It’s possible that paying off your personal loan could initially have a negative impact on your credit score, even if you stick to the repayment schedule. This may seem counterintuitive, but the reason for this is that paying off a debt could shorten the length of your credit history and/or alter your credit mix – two factors that credit reporting bureaus consider when determining your credit score.

However, according to credit reporting company Equifax, a potential credit score reduction from paying off a personal loan will likely only be temporary. Plus, the benefits that may come with paying off your loan, including minimising your debt and reducing your debt-to-income ratio, will often outweigh any initial credit score dip you may incur.