Can You Pay Off Your Personal Loan Early?

When you take out a personal loan, you agree to repay the debt over a set period. Depending on your goals and the lender you choose, you might decide to pay it off over two years, five years, six years, 10 years, or even longer.

When you've chosen your payment timeline, your monthly payments will be calculated based on how much it will take to pay off the principal balance, plus interest, over the time period you chose. As long as your payments come out of your bank account on time and as planned, you will be debt-free on the date you chose when you first borrowed.

But what if you want to repay your personal loan early? Is this something you can do?

Are you allowed to repay your personal loan ahead of schedule?

You are always able to pay your loan ahead of schedule, either by making lump sum extra payments or by paying more each month toward your loan so you bring the balance down faster.

However, there could be a catch. Some personal loan lenders charge a prepayment penalty if you pay off your loan early. Depending on the lender, this prepayment penalty could equal:

• A flat fee you're charged if you repay your debt before the end of your scheduled term.
• A percentage of the unpaid loan balance.
• Some or all of the interest that your lender will not be earning due to the early loan payoff.

Sometimes, these penalties could add up to hundreds of dollars or more. Say you have $8,000 remaining on a $10,000 personal loan and you come into some money and want to pay it off -- but there's a prepayment penalty equal to 2% of the unpaid loan balance. If you get hit with that 2% on an $8,000 balance, you'll lose $160 to your lender.

Ideally, when you first take out a personal loan, you'll read the fine print and make sure your lender doesn't charge you just for the privilege of paying your debt off ahead of schedule. But if you've already taken out your loan and this penalty is in the contract, there's not much you can do about it.

In that case, you'll have to see if you still end up saving money after taking the prepayment penalty into account. If you'll save $600 in interest by paying your loan off early but will lose $160 to a prepayment fee, an early payoff would still make good financial sense.

But if you'll only end up saving $10 or $20 in interest after taking the penalty into account, you may not want to waste your money paying your loan early -- you could invest it instead.

Check the fine print before moving forward

Your personal loan contract should specify what prepayment penalty, if any, applies. Be sure to read the details carefully, or ask your lender, so you can find out if you'll be hit with a penalty before you pay extra. That way, you can make the best choice for your personal finances.