What happens if you pay off a personal loan early? (2024)

When it comes to paying down debt, you might have heard that paying off your balance as quickly as possible can help you save money in the long run. And this is often the case. If you pay off your credit card balance in full, for example, you'll save on interest charges.

Generally, the longer you're stuck paying back a loan or other debt, the more you'll pay in interest over the lifetime of the loan. So it seems obvious that paying off your personal loan early would be a good idea — but not so fast.

Below, Select breaks down why personal loans are different from other types of debt and how paying one off early can impact your credit score and your finances.

How are personal loans different from other debt?

There are an abundance of financial products out there when you need money to pay for something. And each is a little different, so it's practically impossible to have a one-size-fits-all approach to debt payoff. You'll want to consider things like interest rates, billing cycles, loan terms and any fees as you make your plan.

Student loans are used for paying tuition and other costs associated with an education. Car loans are meant for helping you purchase a vehicle. Personal loans can be used for pretty much any expense — a wedding, a home renovation, a vacation and even debt consolidation. While you may need to explain how you plan to use the money on your application, there generally isn't a hard and fast rule about how you use your personal loan.

Like a car loan or a student loan, you'll receive a lump sum of money that you need to repay in monthly installments over a fixed period of time (known as the loan's term) along with interest charges.

The repayment period for a personal loan can be anywhere from two to five years, but some are as long as seven years. Car loans are generally six years long on average, while student loans typically have a 10-year timeline, but it could take longer if you're on an income-driven repayment plan.

Personal loans are different from credit cards because there is no set timeframe for paying back your credit card debt, though, the quicker you pay off the balance the less you'll accrue in interest charges. (Ideally, you pay off your balance on time each month and never pay interest.) Credit cards also have a credit limit, which is usually much smaller compared to the average personal loan amount that borrowers request.

While the interest rate on personal loans is generally much lower than that of credit cards, it really depends on how much money you request and your credit score. Keep in mind that the higher your credit score, the more favorable your terms can be; a good credit score will help you get approved for a lower interest rate or a longer loan term or both.

Sometimes, personal loans come with a few additional fees, including an origination fee and a prepayment penalty. It's the early pay-off fee you need to be wary of.

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Looking for a personal loan that’s right for you? Use this tool to get matched with lenders today

Is it possible to pay off a personal loan early?

It is possible to pay off your personal loan early, but you may not want to. Making an extra payment each month or putting some, or all, of a cash windfall, toward your loans, could help you shave a few months off your repayment period. However, some lenders may charge a prepayment penalty fee for paying the loan off early.

The prepayment penalty might be calculated as a percentage of your loan balance, or as an amount that reflects how much the lender would lose in interest if you repay the balance before the end of the loan term. The calculation method will vary from lender to lender, but any prepayment penalties would be outlined in your loan agreement.

There are a number of lenders that don't charge a prepayment penalty. SoFi, for example, won't charge you a prepayment fee for paying off the loan early and there's also no late payment fees. If you'd prefer looking into a peer-to-peer lender, LendingClub is another option for loans with no prepayment fee. Typically, you'll need good to excellent credit to qualify for the best personal loans with the best terms.

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    8.99% - 29.49% when you sign up for autopay

  • Loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 84 months

  • Credit needed

    Good to excellent

  • Origination fee

    No fees required

  • Early payoff penalty


  • Late fee


Terms apply.

How does paying off a personal loan early affect your credit score?

When you pay down your credit card balance, you lower the amount of credit card debt you have in relation to your total credit limit. This means your utilization rate, which makes up 30% of your credit score, is lowered and it can help you give your credit score a little boost. So shouldn't the same be true when paying off your personal loan?

According to Experian, personal loans don't operate the same way because they are installment debt. Credit card debt, on the other hand, is revolving debt, which means there's no set repayment period and you can borrow more money up to your credit limit as you make payments. Installment debt is a form of credit that requires you to repay the amount in regular, equal amounts within a fixed period of time. When you're done repaying the loan, the account is closed.

When you take on a personal loan, you add to the number of open accounts on your credit report. The loan can also improve your credit mix, which makes up 10% of your FICO score. But when you pay off an installment loan, it appears as a closed account on your credit report. Closed accounts aren't weighted as heavily as open accounts when calculating your FICO score, so once you pay off your personal loan, you'll have fewer open accounts on your credit report.

If you pay off the personal loan earlier than your loan term, your credit report will reflect a shorter account lifetime. Your credit history length accounts for 15% of your FICO score and is calculated as the average age of all of your accounts. Generally, the longer your credit history, the better your credit score will be. Therefore, if you pay off a personal loan early, you could bring down your average credit history length and your credit score. How much of a change in your credit score will depend on your overall credit profile.

Having a low credit score can put you at a disadvantage making it difficult to get an apartment, good financial products, even a job. However, practicing good financial habits, like making consistent, on-time payments and avoiding applying for too many new lines of credit at the same time, can help boost your score.

See if you're pre-approved for a personal loan offer.

Bottom line

Personal loans can be a convenient and affordable way to cover a large expense and improve your credit history when used responsibly. But as with any financial tool, you should carefully consider whether your circ*mstances will allow you to get the most benefit from a personal loan. Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.

If you think there's a possibility that you'll want to pay off the loan sooner than the terms require, you should consider submitting an application to a lender that won't charge a prepayment penalty. Always do your research and read the terms and conditions before signing up for a new financial product so you clearly understand what to expect.

Read more

10 questions to ask before you take out a personal loan

Here are the best personal loans if you have bad credit but still need access to cash

Personal loans for debt consolidation: What's the average amount?

What credit score do you need to get a personal loan?

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

What happens if you pay off a personal loan early? (2024)


What happens if you pay off a personal loan early? ›

Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.

Is it good to pay off a personal loan early? ›

If you have personal loan debt and are in a financial position to pay it off early, doing so could save you money on interest and boost your credit score. That said, you should only pay off a loan early if you can do so without tilting your budget, and if your lender doesn't charge a prepayment penalty.

Will my credit score go down if I pay off a personal loan early? ›

When you close the account, you will now have fewer open accounts and less account diversity. If you paid your loan off early, your history will reflect a shorter account relationship. This can result in a decrease in your credit score.

Is it good to prepay a personal loan? ›

When you prepay your loan, then the overall EMI gets lowered allowing you to pay a lower interest on your outstanding amount. Your credit score also improves and you also get to save money.

Can paying off a loan hurt your credit? ›

It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.

What is the fastest way to pay off a personal loan early? ›

How to pay off a loan early
  1. Check if you have a prepayment penalty. ...
  2. Consider switching to biweekly payments. ...
  3. Make extra payments whenever possible. ...
  4. Adjust your budget to cut expenses. ...
  5. Bring in extra income. ...
  6. Think about refinancing your loan.
Sep 27, 2023

Why did paying off a personal loan lower my credit score? ›

If your personal loan is one of your oldest standing accounts, once you pay it off it becomes closed and will no longer be accounted for when determining your average account age. Because of this, your length of credit history may appear to drop.

Should I pay off my personal loan or credit card first? ›

In general, it's best to pay off credit card debt first, then loan debt, since credit cards often have the highest interest rates. When you prioritize paying off credit card debt, you'll not only save money on interest, but you'll potentially improve your credit too.

What happens if you get a loan and don't use it? ›

If it's an unsecured personal loan (meaning no collateral was involved), most lenders don't care what you do with the funds. However, a debt consolidation loan is an exception, because it was granted for a specific purpose.

What happens if I pay a lump sum off my loan? ›

It'll Speed Up Your Loan Payoff Time Frame

In addition to reducing what you're handing over to the lender for interest, a lump sum payment would also get you closer to being debt-free faster.

Why do lenders not like prepayment? ›

When they drop, debt issuers have a strong incentive to refinance their debt at lower prevailing rates. Not so with lenders. They dislike prepayments as they lose the remaining interest payments on the loan. They can also incur additional costs as they rebalance their portfolio of long and short-term loans.

Why is my credit score going down if I pay everything on time? ›

Using more of your credit card balance than usual — even if you pay on time — can reduce your score until a new, lower balance is reported the following month. Closed accounts and lower credit limits can also result in lower scores even if your payment behavior has not changed.

How to raise your credit score 200 points in 30 days? ›

How to Raise Your Credit Score by 200 Points
  1. Get More Credit Accounts.
  2. Pay Down High Credit Card Balances.
  3. Always Make On-Time Payments.
  4. Keep the Accounts that You Already Have.
  5. Dispute Incorrect Items on Your Credit Report.

Why did my credit score drop 100 points after paying off my car? ›

Paying off something like your car loan can actually cause your credit score to fall because it means having one less credit account in your name. Having a mix of credit makes up 10% of your FICO credit score because it's important to show that you can manage different types of debt.

How long does it take to rebuild credit after paying off debt? ›

It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.

Is it better to pay off a loan in full or make payments? ›

In most cases, paying off a loan early can save money, but check first to make sure prepayment penalties, precomputed interest or tax issues don't neutralize this advantage. Paying off credit cards and high-interest personal loans should come first. This will save money and will almost always improve your credit score.

How much will my credit score go up if I pay off a collection? ›

VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore.

How long does it take for your credit score to go up after paying off a car loan? ›

Whenever you make a major change to your credit history—including paying off a loan—your credit score may drop slightly. If you don't have any negative issues in your credit history, this drop should be temporary; your credit scores will rise again in a few months.


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