Is There a Penalty For Paying Off a Personal Loan Early?

If you have some extra cash on hand, you might be thinking about paying off a personal loan that you have early. We will discuss whether it’s good to pay off a personal loan early and whether there is a penalty for paying off your personal loan early in much detail below.

Is There a Penalty For Paying Off a Personal Loan Early?

Many personal loan providers place a penalty for paying off a personal loan early, the only way to know if you will be subject to a penalty for paying off your personal loan early is to consult your personal loan agreement. If there is a penalty it must be included in your agreement. All personal loans are different, so you should obtain a copy of the agreement by contacting your personal loan provider or by accessing it online.

Personal loan providers often charge penalties for paying off personal loans early so that they can obtain a portion of the interest that you would have paid prior to paying off your loan.

In some situations paying off a personal loan early may cost you more than paying it off according to your initially agreed upon schedule because of prepayment penalties imposed by some personal loan lenders.

So, to assess whether paying off a personal loan early is a good idea, you should consult your agreement and see if paying off the loan and paying the penalty is less than continuing to make payments on your loan.

If paying off the loan early will save you money on the long run, you should pay it off, however, if you will end up paying more to pay off your loan early, you should just set the money aside and continue making payments on your personal loan until you’ve paid it off.

That said, some personal loan lenders do not charge penalties for paying off a personal loan early. In such a situation, it makes financial sense to pay off your loan early because you will save money by not paying additional interest on the money that you’ve borrowed.

What is a Prepayment Penalty Fee?

A prepayment penalty fee is a fee that some personal loan lenders charge their borrowers for paying off their personal loans early. This is done by lenders to gain some of the interest that you would have paid had you paid off the loan regularly.

Charging a prepayment penalty for paying off a loan early makes sense from the perspective of a personal loan lender because they make their money through the interest that they charge for lending you money.

Can You Pay Off Your Personal Loan Early?

Yes, usually with any type of personal loan, you have the option of paying off your personal loan early, the only thing you have to pay attention to is whether you are required to pay a pre-payment penalty also known as early personal loan pay off penalty. Some lenders do not require the payment of a penalty while others do require the payment of a penalty. So, to know whether it makes sense to pay off your loan early, you should consult your personal loan agreement to see whether you have any prepayment penalty fees.

How Much is the Penalty For Paying Off Your Personal Loan Early?

The amount of the penalty or fee for paying off a personal loan is different from one lender to another. Some lenders may base your early payoff fee as a percentage of your remaining balance and others may base the penalty on the remaining interest for your loan. Lenders do this because they make money on personal loans through the interest they charge and when you pay off a loan early you’re depriving them of that interest.

Regardless of how your personal loan lender calculates your early payoff fee, you should contact them and ask them to send you a copy of your loan agreement. Your agreement should spell out the terms of your early payoff. Some agreements don’t have this clause while others do.

How to Avoid Paying a Penalty for Paying Off a Personal Loan Early?

The first option that you have to avoid paying a penalty for paying off a personal loan early is to take out a personal loan without a pre-payment penalty. This may seem obvious but people rarely look at their personal loan agreement to determine whether they can pay off their loan early and whether they’ll have to pay a penalty. So, if you’re thinking about taking out a personal loan that you may want to pay off early, ask your lender or consult your agreement to determine whether a prepayment fee applies.

If you already have a person loan that you want to pay off early, you should contact your lender and ask them about your options. Your lender may waive the entire fee or a portion of it. That said, if they refuse to waive your fee, you should assess whether the amount of interest you’ll save by paying off your loan early exceeds the prepayment fee, if it does, it will be worth it for you to pay off the loan early.

The third option you have to pay off your loan early is to make bi-weekly payments on your. Doing this will you to pay off your loan within 1/2 of the time. This is a great option for someone who gets paid on a bi-weekly basis and wants to pay off his or her personal loan.

Will Paying Off Your Personal Loan Early Improve Your Credit Score?

People often believe that paying off their personal loans will immediately boost their credit score, however, the reality is that paying off a personal loan early or on time will result in a small drop in your credit score.

A slight point decrease is possible because when you pay off a personal loan, you’re effectively closing down an installment account. Closing down and installment account reduces the diversity of your accounts, which tends to cause a small drop in your credit score.

That said, so long as you’ve made all of your payments on your personal loan accounts, rest assured that your credit score will improve within a few months of paying off your personal loan.

That said, paying off your personal early is a good idea if you’re able to do so because it will save you on interest and reduce the amount of outstanding debt that you have. So, the minor drop in your credit score is just that, a minor drop, your credit score will recover fairly quickly so long as you’ve made your payments on time.

Credit Score Planet Frequently Asked Questions (FAQs)

Some states have outlawed penalties imposed on consumers who pay off their personal loans early. However, banks are regulated by Federal Laws and federal laws still permit the practice. So, if you are unsure as to whether you’re liable for an early payment penalty, you should consult your personal loan agreement.

2. Is it bad to pay off a personal loan early?

If you have cash, it may be a good idea for you to pay off your personal loan early because you will end up paying less interest and you’re reducing your debt, which is always a great thing.

3. What happens when you pay off a personal loan early?

When you pay off your personal loan, you’re essentially closing down an installment account and are therefore reducing the diversity of your credit accounts. closing down an account can cause a temporary and small drop in your credit score. However, if you have made all of your personal loan payments on time, your credit score will recover fairly quickly.

4. Will I have to pay a fee for paying off my personal loan early?

Some personal loan lenders charge a fee or penalty for paying off your loan early. That said, to know whether you will be charged a penalty for an early pay off, you should look at your personal loan agreement.