Taking out a personal loan is a great way to get some extra cash to pay for a wide variety of potential expenses.
But once you get that money from a lender, you're obligated to pay it back.
Living with debt isn't easy.
The balance owe on your personal loan can weigh heavily on your mind, and may even cause you to lose sleep at night.
Fortunately, there are ways for you to pay off your loan fast and put your mind at ease.
Whether you've already taken out a loan or you're in the process of applying for one, we've prepared this guide to be really helpful for you.
It's never too soon or too late to start planning how to pay your loan off.
With this in mind, there are also some potential drawbacks and other factors to take into consideration before you start paying down a loan early.
I'll cover all of those as well.
Benefits of Paying Off Personal Loans Early
Not only is it stressful when you're living in debt, but it's also expensive.
So, in addition to getting a clear mind once the debt is paid back in full, you'll also benefit from less interest charges.
Avoiding extra costs can save you hundreds or potentially thousands of dollars in the long run, depending on the amount you borrowed, the period you're paying it back, and the interest rate.
Another benefit of paying off your loan is the extra cash.
You've been coming up with these loan payments on a monthly basis.
Now you can put that money toward something else.
This doesn't mean that you should go buy new jewelry or designer clothing.
Just be smart about it.
If you don't need to buy something at that time, put that money toward your savings or retirement.
In the future when you need cash, you may have enough saved up to the point where you can avoid taking out a loan altogether.
Paying off a personal loan early also reduces your overall debt.
By paying your debt now, you will help reduce the chances of still owing large sums of money when you want to retire.
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Potential Drawbacks of Paying Off a Loan Too Soon
While paying off your loan early may, in general, sound like a great idea, it's not always the smartest and most financially sound decision.
There are certain factors that you need to take into consideration before you do this.
For starters, you need to make sure that you're not facing a prepayment penalty.
Some loans have these penalties included in the terms.
If your loan has a prepayment penalty, you need to weigh that cost against the amount of interest charges you'll save by paying it off early.
But with that said, your best option is to avoid applying for loans with these terms entirely.
Try to negotiate with your lender if they won't give you a loan without a prepayment penalty clause.
See if they'll agree to set the terms so that you would only be penalized if you paid the money back extremely fast, like within six months.
This assures the lender that they'll still make some money in interest charges.
Paying off a loan too soon has certain tax implications as well.
You may lose some advantages if you pay the balance off.
For example, mortgages and federal student loans have tax advantages depending on how you file.
So it's best to speak with your accountant or financial advisor before starting early loan payments.
You also don't want to empty your savings account just to pay off a loan.
It's important to have money set aside for emergencies, like losing your job, getting sick, or unexpected car expenses.
An alarming percentage of the population doesn't have enough money saved up for emergencies.
It's not wise to save money on interest charges if you're left with zero dollars in the bank.
Here's something else to consider.
Believe it or not, paying off your loan early could actually hurt your credit score.
If you don't have a diverse range of open credit lines, closing an open line could lower your score.
You can learn how to monitor your credit score for free to see the effect of your actions on your score.
Tips to Pay Off Personal Loans Fast
Now that you've seen the pros and cons of paying off a personal loan early, it's time for you to make a choice.
You've decided that you want to pay off your debt as fast as possible.
That's great. But now what?
This is much easier said than done.
Fortunately, I'm here to help you out. I've outlined some of the best ways to pay off your personal loans and bad credit loans as quickly as possible.
Make Bi-Weekly Payments
Your loan payments are likely due once per month.
But instead of sticking with that schedule, you can start paying every two weeks.
Yes, this means that you'll have to come up with cash faster, but getting in this habit is one of the best ways to pay off your personal loan.
On the surface, it might feel like paying every two weeks is the same as just doubling your payment schedule.
But over the course of a year, it adds up to more than that.
If you paid twice per month, it would total 24 annual payments.
But bi-weekly payments total 26.
Also, this strategy helps you lower accumulated interest, since the payments are applied more frequently.
Make One Extra Payment
If you can't afford to make bi-weekly payments, that's OK.
At the very least, you can commit to one extra payment per year.
So instead of making 12 payments, you'll make 13.
It may not seem like much, but the same concept applies here.
Doing this will help you shave several months off the duration of your loan and lower your total interest paid.
Fit this extra payment in whenever you can. It doesn't have to be the same time each year.
But I'd recommend doing it earlier in the year, instead of waiting towards the end.
That's because the holiday season is expensive, and comes with extra financial stress.
You're only adding to this stress by saving your extra loan payment until the end of the year.
This may not be feasible if you're spending extra money on gifts and things like that.
Apply Unexpected Cash Toward Your Loan
Any extra money that you get throughout the year can be used to pay down your debt.
I'm referring to things like:
- Birthday cash
- Bonus at work
- Holiday gifts
These are all unexpected and pleasant surprises.
OK., so maybe not all of them are completely unexpected.
If you know that a certain family member always gives you $100 for your birthday, you might be expecting it.
But either way, I'm talking about any money you receive that's not guaranteed.
Who knows, maybe you'll inherit some money while you're paying back the loan.
Instead of spending that on a new car or a vacation, use those funds to pay off the debt you owe.
With interest involved in the equation, it's going to be rare for your payments to be a round or whole number.
So let's say that you owe something like $337.29 for your first month. Round up.
No, I'm not saying to round up to $338 or $340—just a couple of extra bucks won't make a huge impact.
Instead, round up to $400.
Paying an extra $50 or $100 each month is something that's less of a financial burden on you.
It doesn't have to be the same amount each month. Do what you can.
But rounding up for the duration of the loan will definitely save you money in terms of total interest paid.
Depending on the current terms of your loan, it may be in your best interest to consider some refinancing options.
But there are certain factors that you should take into consideration.
The first one is your credit score.
Has your credit improved since you initially received the loan?
If the answer is yes, it will increase your chances of getting approved for refinancing.
You also need a clean payment history.
If you've missed payments or were late, lenders may not be willing to offer favorable refinancing terms.
The amount of your loan also plays a factor in this decision.
You should also realize that refinancing could potentially extend the duration of your loan.
But it would be up to you to make the early payments to pay it off faster.
Stop Dining Out
It may seem harmless, but food expenses really add up over time.
How many nights a week do you go out for lunch or dinner?
It all adds up even faster if you're paying for other people, like your spouse or children.
Just take a look back at your credit card statements to see how much you spent on your last dinner.
I'm willing to bet that you could buy groceries for the entire week with just the money used on that one meal.
You really need to be aware of how much your food is costing you.
Let's say you buy a $10 sandwich for lunch twice per week.
You may not think that $20 is a big deal.
But for half of that price, you could make your own sandwich every day for the entire week.
Do you drink coffee? Make it at home instead of buying it.
You may be thinking to yourself that this is unnecessary.
The coffee you buy only costs $3.
Well, do the math.
Assuming you only get one coffee per day, five days each week (when we both know it's more than that), it's going to cost you $15 per week and $780 per year.
Put that money toward your loan instead.
Cut Unnecessary Expenses
When you're trying to pay off a loan early, you obviously need to come up with some extra cash each month.
But if your paychecks remain the same, this money needs to come from somewhere else.
So go through your expenses and see what can be cut out.
Essentials like electricity, gas, and water would obviously need to stay.
But you may want to reevaluate your TV, phone, and Internet plans.
Do you really need a cell phone and a landline?
How much are you paying for television?
You may want to consider cutting premium channels like HBO, Showtime, Starz, or any sports packages that cost extra.
If necessary, you could get rid of your cable package altogether.
Next, look at your streaming services like Netflix, Hulu, or Amazon Prime.
Sure, most of these are only $10 to $20 per month, but if you have a few of these, it will end up being an extra $300 or more that you could put toward loan repayments.
Do you have Sirius XM radio in your car? Get rid of it.
You can listen to free radio stations and save yourself the money.
Sell Unwanted Items
Get rid of things that you don't want, need, or use.
Use platforms like Craigslist, eBay, or Letgo to make some extra cash.
You can also bring items to pawn shops or consignment stores. Have a garage sale.
If you're going to sell your things online, you should look at the categories with the highest and lowest conversion rates on eBay to give you an idea of where to start.
Keep this in mind before you put up something that probably won't get bought, like a bridesmaid dress.
You'll probably have better luck bringing that to a consignment shop.
Selling your stuff may not feel like you're making much money per item sold.
But over time, this adds up.
Put all of your profits from these sales toward your loan repayment.
Save Your Change
When you get home at the end of the day, empty your pocket change into a cup or jar.
You could even take an empty shoe box and periodically throw $1 bills or even $5 bills into it whenever you get them as change.
At the end of the year, you'd be surprised how much money will be in there.
But what if you don't pay with cash? No problem.
There are mobile apps out there that round up the change from your credit card purchases and put them into an account.
Again, it may not seem like much, but this will add up over time and can help you with extra payments.
Don't get me wrong. I'm not implying that you're not working hard right now.
I'm just saying that you should do whatever you can in your professional career to make extra money.
If your boss offers you an extra shift, take it.
Yes, I know you don't want to work nights or weekends, but sometimes that's the sacrifice that you'll need to make.
Working harder at your job could do more than just translate to some overtime hours.
You could potentially get a raise, bonus, or a promotion.
If this isn't possible at your current job, consider picking up something else part-time.
Drive for Uber or look for odd jobs online.
What to do When Your Loan is Paid Off
Alright. So you applied these tips and finally paid your loan off early.
Perfect! But now what?
Keep up with these new habits.
Just because your loan is paid off, it doesn't mean that you should go back to buying coffee and eating lunch out every day.
I'm not saying that you should completely deprive yourself.
If you cut out expenses like TV and streaming services, you may consider signing back up for one of them again.
But you don't need all of them.
Do everything that you can to keep saving money.
This will have a tremendous benefit to your financial future.
Do you think we missed other helpful tips on quickly paying off personal loans?
We'd love to hear your thoughts about making early loan payments.
Let us know in the comments below!