rewrite this title How to Pay Off a Personal Loan Faster – NerdWallet

Paying off a personal loan faster can save money on interest and free up room in your budget. But if you have higher-interest debts or you don’t have much savings, it may not be the best use of your excess cash. It’s also important to understand how your lender handles extra payments.

You can pay off a personal loan faster, typically by paying more than the minimum on your monthly payment or by making extra lump-sum payments.

Personal loans rarely have prepayment penalties, which are charges a lender assesses to recoup some of their lost interest when a borrower pays off their balance early. Of 32 lenders surveyed by NerdWallet, none charged prepayment penalties for personal loans.

While few lenders penalize you for fast-tracking your loan payoff schedule, there are a few subtle differences in how they handle additional payments.

To pay off debt faster, you want extra payments going toward your principal balance (the amount you borrowed), rather than interest and fees. Most lenders apply additional payments — whether you pay more than your monthly minimum or make an extra one-time payment — to outstanding fees and accrued interest first, then to your principal.

An easy way to pay off a personal loan faster is to tack on extra money to your monthly payment. For example, if your monthly loan payment is $347, you could round it up to $400 to pay down your principal faster.

If you use autopay, make sure your budget can comfortably support the higher payment amount on a regular basis. Otherwise, it’s best to use autopay to pay the minimum and make extra payments when you can afford it.

How lenders handle larger monthly payments: Lenders often treat larger monthly payments as principal-only payments, but some will put the extra amount toward your next monthly payment.

For example, if your minimum payment is $250 and you made a $500 payment in January, the lender may count it as your February payment as well. But to speed up your loan payoff and maximize your interest savings, you’d still want to make February’s payment as usual, even though you’re not required to do so.

Using occasional windfalls like your tax refund or a bonus to make extra loan payments is a smart way to accelerate your debt payoff.

Try to continue making your regularly scheduled payments, even if your lender pushes your due date forward.

How lenders handle lump-sum payments: Many lenders automatically treat extra payments as principal-only payments, assuming you don’t have outstanding fees or accrued interest. However, some lenders treat these payments as early payments and reduce your monthly payment accordingly. If your extra payment covers more than a full minimum payment, the lender may also push your due date forward.

Because there are 52 weeks in a year, you’ll make 26 half-payments if your lender lets you pay biweekly. That means you’ll make 13 total payments (instead of just 12) over a year. Many people also find that paying every other week syncs better with their pay schedules.

How lenders handle biweekly payments: Not all lenders allow biweekly personal loan payments. Some lenders make you jump through a few extra hoops, like making manual payments or calling customer service, to set up a twice-monthly schedule.

Save money on interest. One of the biggest benefits of speeding up your personal loan payoff is the interest savings. Suppose you take out a $20,000 loan with a 12% annual percentage rate, five-year term and $445 monthly payment. You’d pay $6,693 in interest over the life of the loan.

Adding $50 to your monthly payment would save you $943 in interest and allow you to pay off your loan seven months faster.

More money in your monthly budget. Paying off your personal loan faster frees up money in your budget to put toward other financial goals.

In the example above, paying your loan ahead of schedule would leave you with an extra $495 each month (your $445 monthly payment, plus the extra $50). You could put those funds toward your emergency fund, other debt payments or a discretionary expense, like a vacation.

May not be your most expensive debt. Some types of debt, like credit cards, typically have higher interest rates than personal loans. To get the biggest savings, focus on paying off your highest-interest debt first.

Could deplete your savings. Using a large chunk of your savings to get rid of a personal loan faster could put you at risk if you’re hit with an emergency or unexpected expense.

Refinancing your loan instead of paying it off faster could make sense if your credit profile has improved since you took out the loan and you qualify for a better rate.

Let’s say you have $12,000 remaining on a loan with a 20% APR and a $400 monthly payment. But because you’ve paid down the debt, you now have better credit and qualify for a loan with a 10% APR and a three-year term.

About the author

Robin Hartill, CFP®, is a freelance writer who covers personal finance for NerdWallet. She holds a bachelor’s degree in English from the University of Florida. With more than 15 years of writing and editing experience, Robin enjoys breaking down complex financial topics for readers to help them make smart decisions about money. She is based in St. Petersburg, Florida.