In most cases, paying off a loan early can save money, but check first to make sure prepayment penalties, precomputed interest or tax issues don't neutralize this advantage. Paying off credit cards and high-interest personal loans should come first. This will save money and will almost always improve your credit score.
If you have the financial stability and your loan has a high interest rate, paying it off early may be beneficial. However, if you have other financial priorities or lower interest rates, it might be wiser to pay over time while investing or saving for other goals.
Interest savings: Paying off your loan early can reduce the total interest paid, saving you money. Improved financial health: Eliminating debt early can improve your financial stability and reduce monthly expenses.
U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless. Paying off a high credit card balance can be a daunting task, but it is possible.
Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.
Potential Drawbacks of Paying Off a Loan Early
Some lenders impose prepayment penalties, which will reduce the financial savings of early repayment. City Credit Union does not impose penalties for early loan payoffs, by the way. Also, paying off a loan early may affect your credit score.
Paying off a loan early can positively or negatively impact your credit score, depending on the specifics of your credit profile. But paying a loan off early may have other benefits, such as saving on interest and lowering your debt-to-income ratio.
While the answer varies on a case-by-case basis, it's often important to strike a balance between the two. Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes.
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
Prepayment penalties can be charged in a variety of ways. They may be calculated as a percentage of the remaining loan amount — typically 1 to 2 percent. The penalty could be equal to a certain number of months' interest. Or some lenders may charge a flat fee.
The most significant benefit of paying off a loan early is that you're saving more money by no longer paying interest on your loan (this calculator can help show you that amount!).
The Debt You Have
For example, starting with high-interest credit card debt might make more sense before aggressively tackling your student loans. High-interest credit card debt means higher interest charges. Paying off your credit cards first could save you money in the long run.
If the debt interest outweighs the savings interest, it's a no-brainer: use at least some of your savings to clear your debts. Otherwise, you're paying out more in the long run. Once you clear the debt, you can then use the money you were paying it off with to build your savings back up again.
Paying off your debt as fast as possible may seem like the responsible thing to do, but not having an adequate emergency fund or saving for your future could leave your finances at a permanent disadvantage down the road.
Extra payments made on your car loan usually go toward the principal balance, but you'll want to make sure. Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want.
There's no formal restriction on how many personal loans you can have at once. However, some lenders might limit how many concurrent personal loans you can have with them.
Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay. Even small additional principal payments can help. Here are a few example scenarios with some estimated results for additional payments.
You could save interest and free up room in your budget by paying your auto loan off early. There are several options available — including refinancing, paying biweekly and rounding up payments, just to name a few. Confirm your lender doesn't charge a prepayment penalty since the cost could be more than what you save.
If you're carrying a significant balance, like $20,000 in credit card debt, a rate like that could have even more of a detrimental impact on your finances. The longer the balance goes unpaid, the more the interest charges compound, turning what could have been a manageable debt into a hefty financial burden.