Best 5 Strategies to Pay Off Your Personal Loan Faster

You’re not the only one who took out a personal loan to pay off high-interest debt or to cover a major expense. An estimated 27 million Americans took out or carried personal loan debt in 2022, according to Credit.com.

Even though personal loans are an excellent tool for organizing your personal finances, loan management is a skill that you should acquire. You can reduce your personal loan balance over time by paying off your loan principal early, making on-time monthly payments, and making otherwise financial decisions.

A step-by-step guide to managing your personal loan

With the aid of this guide, you can effectively manage your personal loan payments, maintain a fair interest rate, and guarantee that more money remains in your bank account.

Step 1: Include loan payments in your budget.

After your personal loan has been approved and you have received the funds, sit down and schedule the loan payment into your monthly budget. Lacking a budget? With this tool from the Federal Trade Commission, even individuals with limited financial knowledge can begin creating a budget.

Determine where you’ll find the extra cash to cover this monthly expense before the first payment is due. Think about if you’ll need to reduce your spending to make financial space available.

Step 2: Remember to schedule the autopsy.

Lenders of personal loans typically inquire about automatic payment setups before the loan contract is signed. This is because auto-pay guarantees timely payments, which is advantageous to both you and the lender and fosters a stress-free lending experience.

Your FICO score is primarily determined by your credit history of timely payments. A discount may also be available from some personal loan providers if you set up automatic payments using your debit card or banking apps.

For the money to be automatically withheld each month and ensure that you never miss a payment, you must supply your bank account details for this discount to be applied to your interest payments.

Step 3: Carefully read your personal loan agreement.

It pays to carefully review the loan terms’ fine print. Even though you might be eager to pay back your loan early, some lenders have early payment penalties.

You should check the repayment terms section of your personal loan agreement for disclosures regarding prepayment penalties, even though the Consumer Financial Protection Bureau states that prepayment penalties are more common with mortgages.

Early loan repayment may still be beneficial even with prepayment penalties, which can be either fixed, interest-based, or a percentage of the outstanding amount. Calculate how much you would save on interest over the loan term by comparing the amount of penalties you would face.

Five strategies to pay off your personal loan faster

There are ways to shorten the term of your personal loan by a few months so that you can pay it off sooner.

1. Increase your monthly payment by a small amount

Paying a little bit extra each month, even if it’s just a few dollars or rounded to the nearest hundred, makes a significant impact. This is so that you can reduce your interest costs by paying off the loan in full early.

For example, paying an extra $100 each month can shorten your repayment period by 22 months and save you over $1,000 if you’re repaying a $10,000 personal loan for the next five years at an average interest rate of 9.5%.

2. Make a lump sum payment

If you’ve received a sizable bonus at work or an unexpected windfall, use the money to pay off your debt. Ask your lender to treat anyone lump sum or installment payment you make as a principal-only payment.

As per the Consumer Financial Protection Bureau, principal refers to the initial amount that you were initially supposed to repay. The price of borrowing the principal is interest.

You’ll need to inquire to find out if you’re qualified for principle-only payments, as some lenders do not accept them or do not offer them automatically. Making sure your windfall isn’t better spent on debt repayments—such as credit card debt or other loans with higher interest rates—is also very important.

3. Schedule biweekly payments

Splitting a single monthly payment into two equal biweekly payments is occasionally permitted by lenders. Although it doesn’t seem like it would help you pay off your loan more quickly, this adds up to an additional payment each year.

As you can see, making extra payments, in any amount, can shorten the repayment period and save hundreds of dollars in interest in addition to significantly reducing the length of your loan.

4. Seek out chances for refinancing

When faced with a difficult situation, you may choose to accept the lowest interest rate available rather than the one you would have preferred. However, you may eventually be able to refinance your personal loan at a lower interest rate if you have a good credit profile or an improved credit score.

Watch your credit report and compare refinanced loan rates from several lenders when the time seems appropriate. If the refinancing costs don’t deplete all of your savings, even a few percentage points can mean keeping hundreds of dollars in your pocket.

5. Take into account loan consolidation

To reduce the chance of missing a payment, think about combining several personal loans or high-interest credit card balances into a single debt consolidation loan if you have several of them.

Consolidating debt is a common use for personal loans; however, as with refinancing, you should ensure that the new loan is free of origination or other fees that could significantly reduce your potential savings.