You Might Owe A Prepayment Penalty
Some lenders include a prepayment penalty clause in loan contracts as a way to recoup the interest theyd lose if the loan is paid off ahead of schedule. 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 youll save on interest, a prepayment penalty could reduce that benefit or negate it entirely, especially if your loan has a low, fixed interest rate or a shorter term. If you anticipate paying off a personal loan early before taking out the loan, know that not all lenders include prepayment penalties in their loan terms. LendingClub, for example, doesnt charge any prepayment fees or penalties, so you can pay off your loan early and save on interest without worrying about the drawbacks.
Personal Loan Prepayment Penalty
If you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $125 per month for five years, the term of that loan is five years. Although your loan term says it cant take you more than five years to pay it off, some lenders also require that you dont pay it off in less than five years.
The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesnt make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.
Can You Pay Off A Personal Loan Early
If you have enough money to make an extra payment or two, then you may be able to pay off a personal loan earlier than planned. Certain factors could affect your ability to make extra payments on a loan, including having other higher interest debts, prepayment penalties for the loan or higher priority expenses and investments, all of which well discuss further down in the article.
Before you decide to put some extra cash toward your personal loan, consider first how paying the loan off early can affect you and your finances.
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Can You Pay Off A Loan Early
Say you took out a $5,000 personal loan three years ago. Youve been paying it off for three years, and you have two more years before the loan term ends. Recently you received a financial windfall and you want to use that money to pay off your personal loan early.
Can you pay off a personal loan early without paying a prepayment penalty? It depends on your lender. Some lenders offer personal loans without prepayment penalties, but some dont. A mortgage prepayment penalty is more common than a personal loan prepayment penalty.
How Long Do I Have To Pay Off My Loan
Many people start paying down personal loans early so they can avoid paying additional interest later on. While this is a sound strategy, its important to consider factors such as your loan period and payment amount before making any final decisions. For example, making small, additional payments on a 10-year loan may only shorten amortization by a few months. In contrast, making additional payments on a 3- or 5-year loan may help you save more time and money. A personal banker can help you decide whether paying off a loan early or putting your money into a savings account will be better for your financial goals.
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When Is It The Right Choice To Pay Off A Loan Early
There are many situations in which paying off your loan early can be beneficial, such as the following:
- Your prepayment penalty is less than the interest you would pay
- You can afford the prepayment penalty and want to be debt-free
- You want to reduce your debt-to-income ratio
- You want to save money on interest
- The money saved in interest is much more than any prepayment penalty charged
- You want to improve your credit score
- You want more peace of mind knowing youve got less debt than you owe
Can I Pay Off My Personal Loan Early
Personal Finance · 06 Mar 2020
Can I pay off my personal loan early?Personal loans can be a practical and efficient way to achieve a goal.
Can I pay off my personal loan early?
Personal loans can be a practical and efficient way to achieve a goal. Whether you want to start your own business, buy a new car or do anything else that needs a cash injection, life can be that little bit easier when your bank balance is healthier.
With careful planning and budgeting, you can work out an affordable repayment schedule for your personal loan. However, you may find that as time goes on, things change that put you in a healthier position than you expected and want to pay off your loan more quickly maybe even in full.
There are many good reasons to do this, though some lenders charge penalties for paying off your loan early. That’s not the case for personal loans taken out through Harmoney.
The financial benefits of paying off a personal loan early
The main benefit of paying a personal loan back early is that it saves you money.
No matter how long your loan term, the earlier you can pay off your debt, the less money you’ll have to pay in total. That’s because, with interest, you pay more the longer you have a loan.
Using our personal loan calculator, you can see this in action. A $30,000 loan with great credit history totals $3,898 in interest over three years, but $6,228 over five years.
Other benefits of paying off a loan early
How to pay off your loan early
Pay a lump sum
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Should You Consolidate Your Debts
Some loans are specifically advertised as debt consolidation loans these allow you to merge several credit commitments into one.
Consolidation loans are now much harder to get. Its important to only consider taking one out when youve explored all your other options, especially if the loan is secured against your home.
While they can seem an attractive option because of lower interest rates and repayments, consolidation loans can often cost you a lot more than sticking with your current loans.
This is because they usually have a much longer repayment term than unsecured loans. You might also risk losing your home if the loan is secured and you cant keep up with the repayments.
When youre consolidating your debts, also try to avoid building up more debt elsewhere.
Make Additional Monthly Payments
Of course, paying off your mortgage ahead of time will entail making additional payments, either monthly, annually or as a lump sum.
Choose a biweekly payment schedule
Paying half of your mortgage payment every two weeks will result in one extra full payment at the end of the year. The math is simple: 26 half payments will total 13 full mortgage payments every year.
This additional payment, applied to the principal, will shorten the life of your mortgage in small increments. Double-check the terms of your agreement and make sure your lender doesnt charge some sort of fee for setting up a biweekly payment schedule. Some lenders will allow you to automate biweekly payments, but you may need to manually pay your mortgage, which could result in accidentally missing a payment.
Pay extra each month
Another way to pay off your mortgage faster is by paying more than the required amount each month. Most lenders will allow you to automatically pay any amount you wish. So you can add just a few dollars or massively increase your payments, whatever works for your budget.
Some people even take out 30-year loans but commit to paying as though they took out a more expensive 15-year loan. This way, they can save time and interest but have the flexibility to pay less if needed.
To be clear, there are no hard and fast rules when it comes to making additional payments on your home loan. Also, there is no limit on the number of extra payments you can make.
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Increase Your Savings Account
One of the biggest advantages of paying off debt is the spare cash you will now have available to address other financial goals and priorities. Ideally, you will use some of the money to increase your savings account, which can help avoid falling into debt again in the future. If you have a surprise bill, you can cover it without using your credit card and repeating the debt cycle, says Tayne.
How Long Does It Take For American Express To Disburse My Loan Funds
American Express will typically send your loan funds within three to five business days after you sign your Personal Loan agreement to the bank or credit card account you designated in your application.
If you are required to add a bank account to receive your loan funds, we will typically send your loan funds to that bank account within three to five business days after we verifyyour bank account. If we cannot verify your bank account, we will not be able to send your loan funds to you and will cancel your loan. Please note that your bank or credit card issuer may take additional time to post your loan funds to your account. If any loan funds do not post to your bank or credit card account within two weeks, please contact us, your bank or credit card issuer.
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Do I Have Room In My Budget For Extra Loan Payments
Extra loan payments can affect your budget just like any other expense. Before you start paying down a personal loan early, take a look at your current income and account balances. Youll want to avoid dipping into your savings to make extra payments, so make sure you have enough discretionary income to put toward your loan.
Avoiding A Prepayment Penalty
Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If thats not possible, you may still have options.
If you already have a personal loan that has a prepayment penalty, and you want to pay your loan off early, talk to your lender. You may be offered an opportunity to pay off your loan closer to the final due date and sidestep the penalty. Or you might find that even if you pay off the loan early and incur a penalty, it might be less than the interest you would have paid over the remaining term of the loan.
You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee.
For example, some mortgages allow payments of up to 25% of the purchase price once a year, without charging a prepayment penalty. This means that while you might not be able to pay off your full mortgage, you could pay up to 25% of the purchase price each year without triggering a penalty.
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Dont Tap Into Retirement To Pay Off A Personal Loan
The average personal loan has an annual interest rate of six to 36 percent. If yours is on the higher end, you may be considering taking money out of your retirement savings to pay it off. Before you cash out some of your funds, consider the consequences. Retirement accounts have an age requirement for making withdrawals. If youre taking funds early, you could incur hefty penalties. And with todays volatile market, you may be selling investments at a low price. You may also be considering pausing your retirement contributions and using the money to pay off your personal loan. Your loan isn’t an investment that will pay you benefits in the future. It may be a better choice to stay the course and pay your personal loan with other forms of cash.
Summary Of Should You Pay Off Your Mortgage Early
- Paying off your mortgage early will save you money on interest.
- Depending on your agreement, your lender may charge you a prepayment penalty.
- Just adding one extra monthly payment each year will help you pay off your loan faster.
- Paying off your mortgage early can slightly affect your credit because it will represent a closed account.
- Using a mortgage calculator, or a mortgage payoff calculator can help you crunch the numbers and determine the best course of action for you.
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How Are Prepayment Penalties Calculated
The cost of a prepayment penalty can vary widely depending on the amount of the loan and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge.
If your loan has a prepayment penalty, figuring out exactly what the fee will be can help you determine whether paying the penalty will outweigh the benefits of paying your loan off early. Here are three different ways the prepayment penalty fee might be calculated:
1. Interest costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the full term of the loan. Using the previous example, if you have a $6,000 loan with a five-year term and want to pay the remaining balance of the loan after only four years, the lender may charge you 12 months worth of interest as a penalty.
2. Percentage of balance. Some lenders use a percentage of the amount left on the loan to determine the penalty fee. This is a common way to calculate a mortgage prepayment penalty fee. For example, if you bought a house for $500,000 and have already paid down half the mortgage, but want to pay off the remaining balance in a lump sum before the full term of your loan is up. In this case, your lender might require that you pay a percentage of the remaining $250,000 as a penalty.
You Have Other Debts To Consider
While the interest rates on personal loans are higher than those you’d find on mortgage or auto loans, they’re lower than the rates consumers typically get with their , car title loans or payday loans.
If you owe a significant amount on your credit cards or loans, then it might make more sense to take that extra money and pay off those debts first.
Think of it this way: a personal loan with an interest rate of 7% will cost you less than $4,000 worth of credit card debt at an interest rate of 20%, or a payday loan with an interest rate of 18%. You might want to pay those more expensive debts off before you worry about your personal loans.
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Will Paying Off A Loan Early Hurt My Credit Score
It might. Once you pay off your personal loan, it will be considered a closed account on your credit report. If closing that account reduces the diversity of your credit portfolio or shortens your payment history, you may end up hurting your credit score even though youre saving money on interest.
However, closing an account is inevitable. You wont be paying off your loan forever, so consider what other accounts you have open. Make sure you have a healthy mix of open accounts and long payment history to offset the closure of your current personal loan.
Case study: Vincent compares his loan prepayment options
Vincent recently inherited a large sum of money and wants to pay off a few loans hes taken out over the years, but he isnt sure if paying them early will be worth the expense.
He creates a small chart to compare his outstanding loans and calculate the interest hell save.
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What Do You Need To Verify My Checking Account
If we do not have an eligible checking account on file for you, and you are required to add a checking account to receive your Personal Loan funds, we may need to verify your checking account by asking you for personal information. If we are unable to verify your checking account for any reason, we will not be able to send any loan funds to you and your loanagreement will be void and unenforceable.
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What Else Could You Do With Your Money
There’s an opportunity cost to paying off a personal loan early. For example, if you’re devoting extra money to your personal loans, you may not be able to get an employer match on your company’s 401. In this case, you’d be giving up a 100% return on your investment.
Likewise, you could build a business with the money that you’re using to pay off a personal loan early. Entrepreneurship can be very profitable, so you could get a higher return.
If you’re trying to pay off a personal loan early and you don’t have an emergency fund you may need to borrow if something bad happens. Those emergency loans will probably have a higher interest rate.
Carefully consider what you may be missing out on when you put extra cash towards your personal loan. If any of those other goals might be a better use of your limited funds, consider prioritizing them.
