What happens if you pay off a personal loan early? (2024)

When it comes to paying down debt, you might have heard that paying off your balance as quickly as possible can help you save money in the long run. And this is often the case. If you pay off your credit card balance in full, for example, you'll save on interest charges.

Generally, the longer you're stuck paying back a loan or other debt, the more you'll pay in interest over the lifetime of the loan. So it seems obvious that paying off your personal loan early would be a good idea — but not so fast.

Below, CNBC Select breaks down why personal loans are different from other types of debt and how paying one off early can impact your credit score and your finances.

What we'll cover

  • How are personal loans different from other debt?
  • Is it possible to pay off a personal loan early?
  • How does paying off a personal loan early affect your credit score?
  • Bottom line

How are personal loans different from other debt?

There are an abundance of financial products out there when you need money to pay for something. And each is a little different, so it's practically impossible to have a one-size-fits-all approach to debt payoff. You'll want to consider things like interest rates, billing cycles, loan terms and any fees as you make your plan.

Student loans are used for paying tuition and other costs associated with an education. Car loans are meant for helping you purchase a vehicle. Personal loans can be used for pretty much any expense — a wedding, a home renovation, a vacation and even debt consolidation. While you may need to explain how you plan to use the money on your application, there generally isn't a hard and fast rule about how you use your personal loan.

Like a car loan or a student loan, you'll receive a lump sum of money that you need to repay in monthly installments over a fixed period of time (known as the loan's term) along with interest charges.

The repayment period for a personal loan can be anywhere from two to five years, but some are as long as seven years. Car loans are generally six years long on average, while student loans typically have a 10-year timeline, but it could take longer if you're on an income-driven repayment plan.

Personal loans are different from credit cards because there is no set timeframe for paying back your credit card debt, though, the quicker you pay off the balance the less you'll accrue in interest charges. (Ideally, you pay off your balance on time each month and never pay interest.) Credit cards also have a credit limit, which is usually much smaller compared to the average personal loan amount that borrowers request.

While the interest rate on personal loans is generally much lower than that of credit cards, it really depends on how much money you request and your credit score. Keep in mind that the higher your credit score, the more favorable your terms can be; a good credit score will help you get approved for a lower interest rate or a longer loan term or both.

Sometimes, personal loans come with a few additional fees, including an origination fee and a prepayment penalty. It's the early pay-off fee you need to be wary of.

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Is it possible to pay off a personal loan early?

It is possible to pay off your personal loan early, but you may not want to. Making an extra payment each month or putting some, or all, of a cash windfall, toward your loans, could help you shave a few months off your repayment period. However, some lenders may charge a prepayment penalty fee for paying the loan off early.

The prepayment penalty might be calculated as a percentage of your loan balance, or as an amount that reflects how much the lender would lose in interest if you repay the balance before the end of the loan term. The calculation method will vary from lender to lender, but any prepayment penalties would be outlined in your loan agreement.

There are a number of lenders that don't charge a prepayment penalty. SoFi, for example, won't charge you a prepayment fee for paying off the loan early and there's also no late payment fees. If you'd prefer looking into a peer-to-peer lender, LendingClub is another option for loans with no prepayment fee. Typically, you'll need good to excellent credit to qualify for the best personal loans with the best terms.

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    8.99% - 29.49% when you sign up for autopay

  • Loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 84 months

  • Credit needed

    Good to excellent

  • Origination fee

    No fees required

  • Early payoff penalty

    None

  • Late fee

    None

Terms apply.

LendingClub Personal Loans

  • Annual Percentage Rate (APR)

    8.98% to 35.99% APR

  • Loan purpose

    Debt consolidation, major expenses, emergency costs, moving, weddings

  • Loan amounts

    $1,000 to $40,000

  • Terms

    24 or 60 months

  • Credit needed

    Good

  • Origination fee

    3.00% to 8.00%of the loan amount

  • Early payoff penalty

    None

  • Late fee

    15-day grace period to make payments with no penalty

Terms apply.

Click here to see if you prequalify for a personal loan offer.

How does paying off a personal loan early affect your credit score?

When you pay down your credit card balance, you lower the amount of credit card debt you have in relation to your total credit limit. This means your utilization rate, which makes up 30% of your credit score, is lowered and it can help you give your credit score a little boost. So shouldn't the same be true when paying off your personal loan?

According to Experian, personal loans don't operate the same way because they are installment debt. Credit card debt, on the other hand, is revolving debt, which means there's no set repayment period and you can borrow more money up to your credit limit as you make payments. Installment debt is a form of credit that requires you to repay the amount in regular, equal amounts within a fixed period of time. When you're done repaying the loan, the account is closed.

When you take on a personal loan, you add to the number of open accounts on your credit report. The loan can also improve your credit mix, which makes up 10% of your FICO score. But when you pay off an installment loan, it appears as a closed account on your credit report. Closed accounts aren't weighted as heavily as open accounts when calculating your FICO score, so once you pay off your personal loan, you'll have fewer open accounts on your credit report.

If you pay off the personal loan earlier than your loan term, your credit report will reflect a shorter account lifetime. Your credit history length accounts for 15% of your FICO score and is calculated as the average age of all of your accounts. Generally, the longer your credit history, the better your credit score will be. Therefore, if you pay off a personal loan early, you could bring down your average credit history length and your credit score. How much of a change in your credit score will depend on your overall credit profile.

Having a low credit score can put you at a disadvantage making it difficult to get an apartment, good financial products, even a job. However, practicing good financial habits, like making consistent, on-time payments and avoiding applying for too many new lines of credit at the same time, can help boost your score.

See if you're pre-approved for a personal loan offer.

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Bottom line

Personal loans can be a convenient and affordable way to cover a large expense and improve your credit history when used responsibly. But as with any financial tool, you should carefully consider whether your circumstances will allow you to get the most benefit from a personal loan. 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.

If you think there's a possibility that you'll want to pay off the loan sooner than the terms require, you should consider submitting an application to a lender that won't charge a prepayment penalty. Always do your research and read the terms and conditions before signing up for a new financial product so you clearly understand what to expect.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal loan review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Read more

10 questions to ask before you take out a personal loan

Here are the best personal loans if you have bad credit but still need access to cash

Personal loans for debt consolidation: What's the average amount?

What credit score do you need to get a personal loan?

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

What happens if you pay off a personal loan early? (2024)

FAQs

What happens if you pay off a personal loan early? ›

Generally, the longer your credit history, the better your credit score will be. Therefore, if you pay off a personal loan early, you could bring down your average credit history length and your credit score. How much of a change in your credit score will depend on your overall credit profile.

What happens if I pay off a personal loan early? ›

Paying off loans early could cause a small dip in your score if you don't have any other installment loans, like a car loan. However, if you have a healthy mix of accounts, including credit cards and installment loans, the drop should be small.

Why does your credit score drop when you pay off a loan early? ›

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

Do you pay less if you pay off a loan early? ›

If you find you have a bit more money in your account you might decide to repay your loan early. This could mean you end up paying back less in interest in the long term. It's important to remember that if you repay your loan early, you will be charged an Early Repayment Fee.

Does paying off a personal loan affect credit? ›

Key Takeaways. Paying off a loan may lower your credit score, but if you practice good credit habits the effect will be minimal.

Is it bad to take out a personal loan for a down payment? ›

Technically, you can, but a personal loan isn't a great option for purchasing a home or making a down payment in most cases. Instead, you'll generally be much better off with a traditional mortgage. However, a personal loan might be a good option if you're looking to purchase a mobile home.

Is it good to close a personal loan early? ›

The pre-closure facility reduces your debt burden; hence it would be a good option for your financial health. No impact on your credit score: Foreclosure or pre-closure of the Personal Loan does not affect your credit score.

Is it better to pay off a loan in full or make payments? ›

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.

How to raise your credit score 200 points in 30 days? ›

How to Improve Your Credit Score
  1. Review Your Credit Reports. The best way to identify which steps are most important for you is to read through your credit reports. ...
  2. Pay Every Bill on Time. ...
  3. Maintain a Low Credit Utilization Rate. ...
  4. Avoid Unnecessary Credit Applications. ...
  5. Monitor Your Credit Regularly.
Jul 23, 2024

How much will my credit score go up if I pay off a collection? ›

VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore.

What happens if I pay half of my personal loan? ›

A partial payment can affect your credit score because a lender will most likely regard it as a missed or late payment if it's below the minimum payment amount. This could lead to marking your account delinquent or in default, which adversely impacts your credit score.

Why is it cheaper if you finish your loan payments early? ›

Save money on interest

Interest is typically spread out over the loan term. You'll pay less interest by paying off your loan early since the lender will have less time to collect interest from you.

Is it worth it to get a personal loan to pay off debt? ›

As of November 2023, the average interest rate on a personal loan with a 24-month term was 12.35%, according to data from the Federal Reserve. So, by using a personal loan to pay off your credit card debt, there could be significant savings, as the average credit card rate is currently 21.47%.

Is there a benefit to paying off personal loan early? ›

High-Rate Personal Loans

While that interest rate may be comfortable for some budgets, it can place a real burden on others. Paying high-rate personal loans off early can save money in interest and free up cash in the monthly budget faster.

What credit score do you need to get a $30,000 loan? ›

This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.

What happens after you pay off a personal loan? ›

But when you pay off an installment loan, it appears as a closed account on your credit report. Closed accounts aren't weighted as heavily as open accounts when calculating your FICO score, so once you pay off your personal loan, you'll have fewer open accounts on your credit report.

Is there a penalty for paying off OneMain loan early? ›

If you want to pay off your personal loan early, you can do so any time and OneMain will not charge you a prepayment fee.

Do you pay less interest if you pay off a mortgage early? ›

Paying Off Your Mortgage Early

You owe less in interest as you pay down your principal, which is the amount of money you originally borrowed. At the end of your loan, a much larger percentage of your payment goes toward principal. You can apply extra payments directly to the principal balance of your mortgage.

Is it better to pay off loans fast or slow? ›

Interest rates play a pivotal role in the decision-making process. If you're dealing with high-interest Debt, the total amount you'll pay can be substantially higher if you opt for gradual payments. In such cases, paying off the Debt can result in significant savings.

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