How to pay off a personal loan faster

With the new year arriving, it may be the perfect time to make “paying off debt” one of your resolutions. You could save hundreds — if not thousands — of dollars’ worth of interest over the life of a personal loan, especially if you’re stuck with a bad credit personal loan rate.

If you’re looking to pay off a personal loan more quickly, there are a few ways you could accomplish your goals. Before you commit extra cash to clearing out debt, consider your savings situation and your monthly budget. Knowing how each early payoff option works can help you choose one that won’t break the bank or put strain on your regular spending.

5 ways to pay off your personal loan faster

You can reduce your personal loan debt more quickly by paying more, earning more or saving more. Paying more may involve regularly making extra payments or paying down one big chunk when you get extra cash. One caveat: Check with your lender to make sure there’s no penalty for paying your balance off faster.

Earning income from a side gig or temporary job can also give you more money to pay down your debt. Similarly, cutting out some items from your budget or refinancing your current loan with a low interest rate personal loan may help you save on interest and get out of debt faster. Each option has its own benefits and challenges depending on your financial situation.

1. Make biweekly payments

A relatively easy way to pay your personal loan off faster is to set up biweekly payments. It may not seem like much, but every year you’ll end up making one extra full payment. Most lenders allow you to make extra payments on your personal loan without paying an extra fee, making it a good cost-saving method.

This option won’t add a lot of extra financial burden or cost to your budget. You can use a biweekly payment calculator to do the math, or you can just divide your current loan payment in half and pay it every two weeks.

2. Pay extra when you get extra money

If you want to make bigger steps toward early payoff, apply larger payments to your principal when you receive extra cash. Use some or all of the funds received from a holiday cash gift, a year-end bonus or a tax refund to hack away at your loan balance.

Keep the following considerations in mind when deciding whether to use this method:

• You may need to contact your lender directly to make sure they apply the amount to your principal balance.

• Your payment won’t go down like it would if you paid down your balance on a credit card.

• Cover other financial bases first. For example, if you don’t have at least $1,000 in an emergency fund, deposit cash to cover that before you apply a large amount to your personal loan balance.

3. Revisit your budget

If you haven’t checked your monthly budget lately, take some time to review your spending. Pay close attention to discretionary spending on restaurants, movies and monthly subscriptions to see if there are places you could scale back.

If you haven’t opened up your car or home insurance statement lately, see if the premiums have increased. You could save significantly by switching to a company that offers discounts for new business or offers overall lower premiums.

4. Refinance your current personal loan

When you refinance a personal loan, you typically replace it with a new loan at a lower rate. You could reduce your annual percentage rate (APR) by 10 or 20 percent if your credit score has increased into the good or excellent range. Refinancing may be an especially good option if you borrowed a bad credit debt consolidation loan and now want to refinance to better terms.

You can also choose a shorter repayment term, which will cut down on interest, but that will also lock you into a higher monthly payment in most cases. However, lenders tend to offer lower personal loan rates for short terms. Check the total cost of your current loan against a potential refinance to be sure you’re saving money — every month and overall.

5. Find a secondary source of income

If you have the time, finding extra income could be a good way to save up to pay off your loan early. Getting a side hustle doesn’t lock you into another scheduled job. You can try jobs with flexible hours — like babysitting, pet sitting, tutoring, food and grocery delivery, driving for Uber or countless other endeavors.

A recent Bankrate Side Hustle Survey found that roughly one-third (32 percent) of side hustlers say they think they will always need the money to make ends meet. If you’re in this category, you may want to continue making regular scheduled personal loan payments to avoid putting undue strain on your budget.

Pros and cons of paying off a loan early

If you’re still on the fence about if it makes sense to pay your personal loan off early, weighing the pros and cons may help you make a final decision.

Pros

• You’ll pay less interest over the life of the loan. Paying off your loan early could save you hundreds — or even thousands — of dollars in interest.
• You’ll be out of debt faster. Making more than the minimum monthly payment also means you’ll kick debt to the curb quicker. As a result, you can free up cash for other important financial goals like saving for retirement.
• You could reduce your payment. If you secure a lower rate by refinancing your personal loan, without extending the loan term, you could see a drop in your monthly payments.

Cons

• You’ll use cash that could be used toward saving or investing. Depending on your financial situation, the money spent on paying off your loan early could be better used toward beefing up your savings or an investment that pays a potential higher return.
• You may be charged a prepayment penalty. Although it’s rare, some lenders may charge prepayment penalties for paying your loan off early, which could negate some of the money you’d save on interest.
• Your payment may increase. While refinancing to a shorter-term loan could result in substantial savings, keep in mind that your monthly loan payments could increase.

Bottom line

You can take several steps to pay off a personal loan faster, including making additional payments or refinancing to a loan with a lower interest rate. Before you make extra payments, though, review your budget to see if it makes sense for your finances and goals.