When Does Paying Off a Personal Loan Early Make Sense?

One of the common questions many people ask is whether paying off a personal loan early makes any sense. Are there any tangible benefits from settling a personal loan earlier than schedule? Can you pay off a personal loan early, and will it actually benefit you? Let’s explore.

In my opinion, the question of whether or not to pay your personal loan early depends on your ultimate financial goals. That’s because repaying a personal loan early comes loaded with both pros and cons.

Hence, it’s a step that you’ll have to consider against the backdrop of several other factors related with your overall financial health. So, can you pay off a personal loan early without hurting your finances? Let’s find out.

Here’re some facts and stats on personal loans in the USA that might be of interest while you consider repaying it earlier or before schedule.

Facts of Personal Loans in USA

Nearly 7.3 percent of all American adults have a personal loan. That sums up to about 24.3 million adults, especially from the working population. Furthermore, 89.2 percent of borrowers are men while 72.9 percent are women. With such a large number of borrowers, many wonder: can you pay off a personal loan early without penalties?

Demographics indicate, that approximately 8.5 percent of White Americans have personal loans and around 10.2 percent of Black Americans have personal loans. Roughly 7.8 percent of Hispanic Americans and about 6.9 percent of Asian Americans such as persons of Chinese, Filipino, Thai, Vietnamese, and other origins have personal loans. Regardless of demographics, the question remains—can you pay off a personal loan early and avoid extra costs?

There’re no figures on personal loans among Indian American community and hence, it’s believed to be negligible. Indian Americans often prioritize financial stability and may prefer to use savings or other resources before considering a loan, research reveals.

Most Indian Americans come from a culture that values saving and avoiding debt. Taking loans might be seen as a last resort rather than a first option, research states. They also constitute the wealthiest class in USA, with median household income in excess of $124,000 per year. Despite financial stability, some still ask: can you pay off a personal loan early and is it always a good choice?

The average personal loan amount in USA is $11,652 and monthly repayments or installments in the range of $350 to $410. Personal loans in the USA primarily are 24 months to 60 months duration, though these figures can vary according to ethnicities and states. If you're repaying a loan, you might be asking—can you pay off a personal loan early and reduce these monthly costs?

Reasons Americans Avail Personal Loans

There’re various reasons for Americans to avail of personal loans. Some of these could be startling enough for those uninitiated. However, the fact remains that personal loans being unsecured largely, are a favorite and mainstay for Americans to get money with fair ease and speed from banks, credit unions, Non-Banking Financial Companies (NBFCs), and other lenders.

Given these reasons, many still question: can you pay off a personal loan early and free yourself from debt sooner?

Here're the main reasons in the US for availing of personal loans.

• Debt Consolidation: Some 50.7 percent of borrowers take personal loans to consolidate other high-interest debt and avoid financial burnout. While consolidating debt, one may wonder—can you pay off a personal loan early without affecting the benefits of consolidation?
  
• Funding New Business: Nearly 27.41 percent of all personal loans taken are to fund a new business venture or startup or as an investment in some personal enterprise. If the business generates profits, can you pay off a personal loan early and improve financial stability?
  
• Medical Treatment: About 26.36 percent of personal loans are used by borrowers to cover out-of-the-pocket medical expenses including medicines and treatments or therapies that a health plan excludes or doesn’t cover for any reason. In such cases, borrowers might ask—can you pay off a personal loan early and reduce the financial burden?
  
• Home Improvement: The fourth largest chunk of borrowers- 17 percent- take personal loans for home improvements including renovation, facelift, home expansion, and similar purposes. After improving their home, homeowners often consider—can you pay off a personal loan early and lower future financial obligations.
  
• Everyday Bills: Shocking as it might sound, about 8.7 percent of all personal loan borrowers use the amount for meeting daily living costs and paying everyday bills, in order to avoid default and loss of services while paying for essentials. This raises an important question—can you pay off a personal loan early even if finances are tight?
  
• Weddings, Emergencies, Other Uses: A small percentage of Americans also take personal loans to finance their wedding or counter an emergency, holiday travel, or to assist a family member in financial trouble. Even for short-term loans, people often wonder—can you pay off a personal loan early to avoid long-term debt?

While some of these reasons and figures could prove unsettling to many, it’s worth knowing, that taking a personal loan is a choice. Some borrowers take it singly while others include their kin such as a spouse sibling or parent as a cosigner, to get a heftier amount as a personal loan.

These factors could help decide whether or not paying off a personal loan early makes sense for your finances. Continue reading because the decision could impact your financial status.

Can You Pay Off a Personal Loan Early? Pros of Early Repayment

As I mentioned earlier, repaying personal loans early is rife with a plethora of pros and cons. Hence, it's advisable to weigh both options rather than falling head-over-heels to repay a personal loan early because you’re witnessing a financial windfall.

Freedom from Financial Stress

Paying off a personal loan early offers freedom from financial stress, which translates as peace of mind and possibly, a shorter route to achieving that dream of financial freedom. It implies you’ve one creditor less to service each billing cycle or month. With less financial stress, you may still ask—can you pay off a personal loan early and truly benefit from it?

Also Read:

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Increased Cash Flow

Obviously, with your loan now settled, the amount you’d have paid as a monthly installment now remains in your bank account or hands. This translates directly as increased cash flow and greater liquidity for you and your household personally. Before making the move, it's essential to ask—can you pay off a personal loan early while maintaining good cash flow?

Savings on Interest

There could be some savings on the amount of interest that you’d have paid in the event of continuing the personal loan through its duration. However, this has to be calculated in realistic terms by considering early repayment penalties that lenders often levy, plus service charges if any. So, can you pay off a personal loan early without losing more in penalties than you save in interest?

Better Debt-to-Income Ratio

Pre-payment of a personal loan has a positive impact on your credit score. It implies you’ve a better income ratio over debt. This translates as ease of getting future loans, mortgages, and other credit if you’re not mired with other high-interest debt.

Can You Pay Off a Personal Loan Early? Understanding the Downsides

Early Payment Penalties

Most banks, credit unions, and other lenders charge a pre-payment penalty when you settle a personal loan before schedule. Often, these penalties combined with other charges might prove to be higher than the interest you’ll pay by continuing the loan. That’s why it’s crucial to check—can you pay off a personal loan early without penalty?

No Significant Credit Score Impact

Contrary to popular belief, repaying a personal loan early might not deliver the desired impact on your credit score. It's worth knowing that credit score also depends on the length of your credit history. So, can you pay off a personal loan early and still maintain a strong credit profile?

High-Interest Debt

Should you be saddled with high-interest debt such as a pricey mortgage or expensive credit card dues, it makes more sense to repay these earlier and stem the financial hemorrhage instead of repaying a personal loan faster. That way, you’ll save a lot of money.

Emergency Fund

Repaying personal loans before schedule could prove disastrous if you don’t have a large enough emergency fund. Ideally, an emergency fund should have sufficient money to last your household for three to six months while maintaining the same lifestyle. It’s useful to counter emergencies and job losses. Repaying personal loan faster without such fund means you’ll not have money for any such eventualities.

As you can see, there are equal pros and cons to repaying a personal loan early. This simply implies you’ll have to carefully assess whether or not you wish to repay a personal loan earlier than scheduled. 

If repayments of a personal loan are proving cumbersome, I would suggest you find some art-time freelance work. That could up your financial situation and help buffer any cash shortfalls.

Wrap Up

Take a calculated decision on early repayment of a personal loan and do so only if the figures work in your favor. Generally, a customer care official at the bank credit union, or lender that’s advanced the personal loan would be able to tell you about any savings and benefits you could accrue. While having lower debt is superb, this goal has to be achieved with prudence. So, before you act, ask yourself—can you pay off a personal loan early and is it the best decision for you?