3 Times It Doesn't Make Sense to Pay Off a Personal Loan Early

Shedding that debt ahead of schedule doesn't always make sense.

There's a reason U.S. personal loan balances reached $222 billion as of 2022's fourth quarter, according to TransUnion. Personal loans are extremely flexible in that they allow you to borrow money for any purpose.

Want to fix up your home? You can use the proceeds from a personal loan to make that happen. Want to take an extended vacation with your family? A personal loan could help you pay for it.

But while a personal loan may be a convenient way to borrow money, ultimately, it's still a form of debt. And that means the longer you carry it, the more interest you're apt to accrue on your loan. 

As such, you may be thinking about paying off your personal loan early. But if these factors apply to you, then you may want to reconsider that idea.

1. When you have a low interest rate

Any time you owe money on a loan, you're paying extra in the form of interest. But if you happen to have snagged a low interest rate on your personal loan, then it could make sense to stick to your regular payment schedule rather than push yourself to pay it off early.

Imagine you're paying 7% on a personal loan, but the investments you have in your brokerage account are earning you an average yearly 9% return. You could technically cash some out to pay off your personal loan. But since you're making more money on your investments, why go that route?

2. When you're short on emergency savings

Your primary financial goal, regardless of your age or income, should be to build yourself a solid emergency fund. At a minimum, that means having enough money in your savings account to cover three full months of essential bills. 

If you haven't yet reached that savings threshold, then you should divert every spare dollar to your savings. And that could mean hanging onto your personal loan a bit longer rather than using your extra money to chip away at its balance early.

3. When you have more expensive debt to tackle

The idea of spending money on interest may not be sitting well with you. And if that's the case, you may be motivated to pay off your personal loan early. But if you have another debt with a higher interest rate attached to it, then that's the debt you should be looking to pay off first -- even if your personal loan balance is smaller and seems easier to tackle.

Let's say you owe $1,000 on a personal loan charging 7% interest, and you also owe $2,500 on a credit card charging 17% interest. Paying off a $1,000 balance might seem more attainable. But since you're paying twice as much interest on your credit card balance, that's the balance worth whittling down first. 

In many cases, paying off a personal loan early makes sense. And you generally will not face a penalty for getting rid of that debt ahead of schedule (though it's always a good idea to read your loan document first, just in case). But before you pay off your personal loan early, make sure that's the best use of your money, and that there isn't another financial matter you should be focusing on first.