In an ideal world, you’d never have to borrow money. You’d slap hard cash on the counter for every large purchase and never owe a silver nickel to anyone.
In fact, in many situations we recommend not buying things until you can afford to pay for them outright. Waiting until you’ve got money in the bank is key to avoiding interest charges—and stress. But in some instances, taking out a loan can be a smart and effective financial strategy to help you achieve certain goals.
So what if you need a large sum of money but don’t want to pay out the nose for interest? Can you pay off your personal loan early?
The answer is yes—but it might not always be a good idea. Here’s what you need to know about prepaying a loan.
Can you pay off a personal loan early?
You absolutely can pay off a personal loan early, and there are several benefits to doing so. Most obvious is the potential savings in interest payments (we’ll talk about that in a minute).
However, some lenders will penalize you for it as a way to recoup some of the interest you’re skirting by closing your loan before the term ends. Nowadays, we find that very few lenders charge prepayment penalties, but you should still read your loan agreement to make absolutely sure.
Additionally, some subprime lenders use something called “precomputed interest” to avoid losing money on a borrower who pays off their loan early. With this structure, the interest charged isn’t recalculated based on the actual amount you owe as your loan is paid down (as is the case with a traditional loan). Instead, the financial institution calculates all the interest you would pay if you only made the minimum monthly payment and adds that figure to your loan amount upon account opening.
Put simply, the interest is heavily frontloaded. If you pay off the loan early, you’ll get a small refund—but you won’t save nearly as much as a loan without this borderline predatory practice.
If you plan to pay off your loan early, be sure to choose a lender who doesn’t implement these maneuvers.
Benefits to paying off a personal loan early
Repaying your debts as quickly as possible is almost always a good idea. Here are some key advantages to paying off a personal loan early.
Save on interest
With a traditional personal loan, you’re enrolled in equal monthly payments. Upon account opening, you’re charged interest based on the amount of money you owe. As you pay down your loan, your interest payments typically decrease—but your monthly payment remains the same. In other words, more of your payment will go toward principal and less toward interest each month.
Paying off your personal loan early will result in fewer interest payments, as your monthly installments will be reduced.
For example, perhaps you’ve got a $15,000 loan with a five-year term at 10% APR. Let’s estimate that if you faithfully make the $318 minimum monthly payment until your loan is repaid, you’ll lose around $4,122 to interest charges. But if you added an extra $150 to each monthly installment, you’d repay your loan in a little over three years—and save something like a whopping $1,603 in interest.
Free up funds
The sooner you pay off a personal loan, the sooner you’ll be free from those monthly payments. This is good for both your wallet and your mental state. Spending years beholden to monthly debt payments can be stressful.
Lower debt-to-income ratio
Your debt-to-income ratio (DTI) is the amount of your monthly income that is dedicated to monthly debt payments. A low DTI is particularly important when applying for things like mortgages and home equity loans.
Closing a personal loan early can drastically reduce your DTI. Paying down your loan balance won’t itself affect your DTI—but completely paying it off will. Only when you’re no longer paying monthly installments will DTI decrease.
When should you not pay off a personal loan early?
There are some rare instances where it may not be a good idea to pay off your personal loan as quickly as possible. Consider the following financial situations.
You’ll be subject to exorbitant fees
Again, early payoff fees can negate the savings that comes from paying off your loan early. It may still be worthwhile—but do the math to make sure you’re saving more interest than you’re losing on fees.
Your APR is low
If you’re managing multiple debts, your personal loan may not be responsible for extracting the most interest from your bank account. Those with high-interest debt, such as credit card balances, will typically do better to pay off those items first—and then direct extra payments toward their personal loan.
You’ll neglect other financial obligations
On a related note, you shouldn’t become fixated on paying off a personal loan early if other areas of your finances will suffer. For example, if throwing extra money toward your loan results in carrying a credit card balance month-to-month, it’s almost certainly not going to save you money in the long run.
You’ll dip into your emergency fund
An emergency fund in a high-yield savings account is a vital component of a healthy financial strategy. If the only way to pay off your personal loan early is to use a part of your emergency fund, it’s probably not a good idea. Best to save that money for something truly essential (think job loss, car repair, medical bill, etc.).
Pros and cons of paying of a personal loan early
Pros
- Save on interest
- Lower your debt-to-income ratio (DTI)
- Free up your budget
Cons
- Your credit mix may be negatively affected
- Your average age of accounts may be negatively affected
- Some lenders charge penalties for early repayment
How to pay off a personal loan faster
There’s no “easy” way to pay off a personal loan faster. It takes budgeting and sacrifice to put extra money toward your loan. Here are the straightforward ways to eliminate your loan as quickly as possible.
- Make additional payments whenever you can: You’re obligated to make at least one minimum payment each month. If you find yourself with some unexpected disposable income during a payment period, consider putting it toward your loan.
- Pay more than your minimum installment each month: If you can afford it, budget to pay more than your minimum installment each month. Any extra you pay should go toward the principal and effectively reduce the interest you owe going forward. This is particularly helpful early on in your loan term, as that’s when your interest payments are the highest.
- Refinance your loan: If you’ve been paying on your loan for a while, it may be worth refinancing to either take advantage of a lower APR or simply to extend your loan term to lower your monthly payment. You could then continue paying the same amount of money each month, but more of your payment would go toward principal.
Editor’s Picks: Best personal loans with no prepayment penalties
We think the very best personal loans do not charge prepayment penalties. Here are our top picks for some of the most common needs.
| Best for | Institution | Loan amount | Max loan term | APR range | See details |
|---|---|---|---|---|---|
| Longer repayment terms | LightStream | $5,000-$100,000 | 240 months | 6.24%-24.89% | View offer at MoneyLion |
| Fee-sensitive borrowers | Wells Fargo | $3,000-$100,000 | 84 months | 6.74%-26.49% | View offer at MoneyLion |
| Low maximum APR | PenFed Credit Union | $600-$50,000 | 60 months | 6.99%-17.99% | View offer at MoneyLion |
| Preapproval | American Express | $3,500-$50,000 | 60 months | 6.90%-19.99% | View offer at MoneyLion |
| Small loan amount | TD Bank | $2,000-$50,000 | 60 months | 7.99%-23.99% | View offer at MoneyLion |
| Longer repayment terms | View offer at MoneyLion |
|---|---|
| Institution | LightStream |
| Loan amount | $5,000-$100,000 |
| Max loan term | 240 months |
| APR range | 6.24%-24.89% |
| Fee-sensitive borrowers | View offer at MoneyLion |
| Institution | Wells Fargo |
| Loan amount | $3,000-$100,000 |
| Max loan term | 84 months |
| APR range | 6.74%-26.49% |
| Low maximum APR | View offer at MoneyLion |
| Institution | PenFed Credit Union |
| Loan amount | $600-$50,000 |
| Max loan term | 60 months |
| APR range | 6.99%-17.99% |
| Preapproval | View offer at MoneyLion |
| Institution | American Express |
| Loan amount | $3,500-$50,000 |
| Max loan term | 60 months |
| APR range | 6.90%-19.99% |
| Small loan amount | View offer at MoneyLion |
| Institution | TD Bank |
| Loan amount | $2,000-$50,000 |
| Max loan term | 60 months |
| APR range | 7.99%-23.99% |
Lender details checked Dec. 11, 2025
The takeaway
In most cases, it’s beneficial to pay off a personal loan early. If you can afford to put extra money toward the loan every now and again, you’ll end up saving money on interest—and you’ll lower your debt-to-income ratio faster.
Just keep in mind that paying off a loan early shouldn’t put an inordinate strain on your finances. If you’re falling behind on other bills or if you’ll pay high fees as a result of prioritizing your personal loan, it’s not a good idea.
Frequently asked questions
Does paying off a personal loan early hurt your credit?
Paying off a personal loan early doesn’t itself hurt your credit. That said, when your loan is fully paid, your account will close. This can negatively affect two elements of your credit score: your credit mix and your average age of accounts. You can expect a small temporary drop in your credit score—but again, this will happen whether your loan is paid off early or not.
What is a prepayment penalty?
A prepayment penalty is a fee that some lenders charge borrowers who don’t use the full term length to pay back their loan.
Is it worth paying off your personal loan early?
It’s often worth paying off your personal loan early to avoid interest. The faster you lower your balance (and the sooner the loan is settled), the less interest you’ll pay.
Is paying off a personal loan early better than paying off credit card debt?
Paying off a personal loan early often is not better than paying off credit card debt. That’s because credit card APR is often considerably higher than personal loan APR. Also, credit card balances can negatively affect your credit utilization (an important factor in a health credit score), while installment loans do not.
Should you pay off a personal loan early if you’re about to apply for a mortgage?
Paying off personal loan debt before getting a mortgage is generally a good idea because it will lower your debt-to-income ratio—a critical factor that lenders examine when determining the mortgage terms they’re willing to extend to you. Just note that your credit score may temporarily drop slightly, as closed loans will ding your credit mix and your average age of accounts.