What are the best ways to pay off a personal loan?
Key takeaways
- Set up an automated payment if the lender offers it to keep on top of your loan and potentially get a discount.
- Consider consolidating multiple streams of debt into one to lower costs, pay it off faster or both.
- Look into refinancing if you can get a better interest rate or want to change your loan term.
Once you have a personal loan, you’ll have to make monthly payments on the principal, interest and fees. Falling behind will harm your credit score and cost you extra in fees.
On the other hand, because of the way personal loan interest works, paying your loan off early helps you save money. Make a plan to manage your loan so you can repay your balance faster.
Be mindful when budgeting
Taking on a loan payment means adding to your monthly expenses. If you need to make space for the loan payment in your budget, consider minimizing spending on unnecessary expenses, such as:
- Eating out.
- Streaming services.
- Gym memberships.
- Leisure travel.
- Alcohol.
- Monthly subscription services.
Rewrite your budget to include the monthly loan payments. If your debt-to-income ratio is too high with the loan, reconsider taking out a personal loan.
— Howard Dvorkin, CPA and Chairman of Debt.com
Set up autopay
When setting up payments for your personal loan, you often have the option to set up automatic payments. This means the lender will automatically withdraw your payments from a specified bank account or credit card at the same time each month.
Setting up autopay saves you the trouble of remembering to make monthly payments. Also, many lenders offer an autopay discount that reduces your interest rate by 0.25 or 0.50 percent.
Speed up your repayment timeline
Paying any extra money towards your personal loan will help you pay off your debt faster. Additionally, paying off the loan early means you won’t pay as much interest and the loan will cost you less — as long as there aren’t any prepayment fees.
How to pay off your personal loan faster
Find a strategy that works for your budget.
Add money to your monthly payment
Making slightly larger monthly payments is a surefire way to see your balance decrease faster. It will reduce the amount of interest you pay. It doesn’t matter how large or small your extra payment is. Even adding a small amount to your monthly payments can make a significant difference.
Make bi-weekly payments instead of monthly
Some lenders will allow you to set up bi-weekly payments instead of making one monthly payment. Your payment amount will be halved and charged every two weeks. While it may not seem like you’re doing much, adding an extra payment each year can help you reduce your total interest accrual.
Pay a lump sum amount
A lump sum is a larger payment made once and is generally much bigger than your normal monthly payment. If you receive an unexpected chunk of change, like a raise or a large tax return, making a lump sum payment may be financially and psychologically beneficial.
When you make a lump sum payment, your monthly payment amount will stay the same, but it will reduce the interest you pay over time.
Consider consolidating
Consolidating multiple high-interest loans with a debt consolidation loan — especially one with lower interest — can make your debt more manageable.
Dvorkin advises consolidating if you have multiple credit card debts and are struggling to pay them off due to high interest. But even if you can keep up, debt consolidation has benefits worth considering. It simplifies your payments and may boost your credit score by eliminating revolving debt.
However, if you won’t save money, consolidating might not be the best strategy.
Before committing, calculate the difference that consolidating could make to your monthly payments.
When not to consolidate
If the debt consolidation loan comes with a higher interest rate than your current accounts, you won’t save any money, and it likely won’t make sense to consolidate. To ensure you’re getting a competitive rate, prequalify for a personal loan with as many lenders as possible.
Origination fees and other charges can reduce the overall value of your new loan. Read the fine print before signing a new loan agreement to ensure you’re not taking on hidden fees.
Refinance
Refinancing a personal loan involves working with a new lender to get a loan for your remaining loan amount with lower rates or different payment terms. Much like consolidating, refinancing can save you money by reducing the amount you pay in interest over the life of the loan.
However, if the fees associated with refinancing are high, they’ll reduce the value of your loan, making it less worthwhile. You may pay more interest over time if the repayment term is longer.
Calculate the amount you will spend on the remaining payments with your current loan versus the new loan to determine if the cost of refinancing is worth it for you.
Is now a good time to refinance a personal loan?
The Federal Reserve has repeatedly raised rates throughout the last two years to cool the inflated economy. Despite a lack of rate hikes in 2024, as of October 2024, the current average personal loan rate is near an all-time high of 12.41 percent.
The Federal Reserve opted to drop its target rate in September, but this relatively small move is unlikely to improve personal loan rates significantly in the near term. Due to the high-rate environment, borrowers who got a good rate on their existing loans are unlikely to find better rates now. However, if the interest rates on your existing loans are high and you prequalify for a lower rate, it may be worth it.
Alternative ways to save money on your loan
If you don’t qualify for the traditional management methods or don’t wish to repeat the borrowing process, there are other ways to save money on your personal loan overall.
- Talk to your lender. See if you can adjust your terms or get a lower interest rate. “On-time payments, a good credit history and other factors like this can help in this process,” Dvorkin says.
- Open a balance transfer credit card. If you can pay off your balance during the card’s interest-free promotional period, you could save a chunk of change. You’ll typically have to pay a 3 percent fee on each balance you transfer. And, if you still owe when the promotional period ends, you’ll be charged the credit card’s interest rate.
How to manage loans: Bottom line
There are multiple ways to manage a personal loan well and save money along the way. Remember that no amount is too small — any extra amount you can put toward your monthly payments will be beneficial. Consider all of your options throughout the entirety of your loan.
You may not be able to consolidate or refinance right now and score a lower rate, but that doesn’t mean the method won’t make sense in the future. As your financial and credit health evolves, so do your repayment methods. Keep your options in mind until the day you pay the balance off for good.
