How to Pay Off a Personal Loan Faster

If you have personal loan debt, you are not alone. Approximately 27 million Americans had personal loan debt at the end of 2022.

Debt is a common part of many people’s livelihoods, but it is possible to get out of debt before your loan’s term ends. Paying off your personal loans quickly has many advantages, and this guide will explore some ways to become debt-free.

Benefits of paying off a personal loan faster

Paying off your loan faster than outlined in your terms has its benefits. These are some of the perks you can expect. 

1. Save on interest

You may be able to save on interest by paying your loan early. A borrower with a $10,000 loan and a 10% interest rate will have to pay an additional $1,000. By paying this loan off early, you could save money over time. 

2. Lower debt-to-income ratio

Your debt-to-income ratio compares your monthly income to your monthly debt obligations. While this does not directly impact your credit score, lenders look at this metric to determine if you can afford the loan payment. Paying off your loan faster decreases your debt, which will lower your debt-to-income ratio.

3. Improve credit score 

Paying off your personal loan faster may help your credit score, especially if you’re making all of your payments on-time, since this can strengthen your payment history. And your payment history plays a major role in determining your credit score – making up as much as 35%. If you have a higher credit score, lenders will trust you with higher loan amounts and lower interest rates. 

If you’re looking for a smart way to work on your credit score, consider joiningMoneyLion’s WOW membership*. With a WOW membership, you can access MoneyLion’s Credit Builder loan. MoneyLion will report payment history to the three major credit bureaus, giving you the opportunity to help improve your credit score in a straightforward way. 

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4. More room in your monthly budget

Completing your monthly payments early will give you additional financial flexibility. Paying a loan in three years instead of five years can free up more of your budget. Removing a $500-per-month loan payment from your budget can create more possibilities.

10 best ways to pay off a personal loan faster

Paying off your loan early has many advantages. Use these strategies to start reaping the benefits.

1. Check for prepayment penalties

A prepayment penalty is a fee your lender charges for paying off your loan earlier than the terms you agreed when you signed the paperwork. The details of the prepayment penalty, such as the fee and circumstances associated with it, are discussed at the loan signing. Reviewing the terms can help you determine whether it is better to pay the prepayment penalty than continue to make payments on the loan. Find out the details to determine what works best for you. 

2. Shorten the length of your personal loan

Instead of choosing a 60-month loan, consider a 24-month loan to pay it off faster. A shorter loan length means you’ll likely pay less interest and save money. But it also means a higher monthly payment. Remember that when agreeing to shorter terms. 

3. Make extra payments toward your personal loan

Making extra payments toward your personal loan is a great way to get out of debt fast. This approach can also provide you with a grace period if you do not have extra funds that month, depending on the lender. For example, if your monthly payment is $500, try making an additional payment each month, even if it is only an extra $25. At the end of the year, that extra $25 equals an extra $300. That’s almost one additional monthly loan payment you accumulated over time.

4. Prioritize high-interest loans

Every loan has an interest rate, and that rate impacts how much you pay on your principal. Loans with higher interest rates cost more, and getting rid of these loans first can save you the most money. Tackling high-interest debt can help you save money and reduce your interest payments. Those lower interest payments may help you cover other loans you have accumulated.

5. Round up your personal loan payment

Rounding up your payment is a simple way to help you make extra payments toward your loan without breaking the bank. If your monthly loan payment is $250, for example, consider rounding your payment up to $300 monthly. If you have the financial flexibility to pay an extra $50 per month, you can get out of debt sooner and put the loan behind you. Not everyone can put an extra $50 per month into a personal loan, but you can pay a smaller amount. Consider rounding up to $260 if you can afford it. Every little bit can help when it comes to making extra payments. 

6. Take on a debt repayment strategy

Many people use the snowball or avalanche strategies to successfully get out of debt fast. 

The snowball method is when you focus on the smallest debts first. Keep making minimum payments on your larger debts while focusing your extra payments on your smaller debts. Once that debt is paid off, move on to the next smallest. Many enjoy this strategy because paying off smaller debt first means you get those little successes sooner, providing a sense of accomplishment. 

The avalanche method focuses on debt with the highest interest, paying the minimum balance on your smaller debts. Once highest-interest debt is paid, move on to the next highest-interest debt. 

7. Consider refinancing your personal loan

You can refinance a loan, which could lower your monthly payments, get you a lower interest rate, or shorten your loan terms — all ways to help you get out of debt faster. Refinancing might make sense if it enables you to save money or pay off your loan sooner. 

But refinancing typically requires another credit check, and there could be fees. There also could be a prepayment penalty for your existing loan and fees for opening a new loan. You may not get a better interest rate than what you already have, so it’s best to consider other options before applying for refinancing. 

8. Make biweekly payments on your personal loan

While it might seem too simple, making biweekly payments on your loan can add up to an extra payment per year. One way to do this is to split your monthly payment in half and make that payment every two weeks. For example, if your monthly payment is $100, you would make two $50 payments per month. This may help you make payments more often so that less interest accrues, and you might shorten the length of the loan. 

9. Find ways to save money

Reallocating your funds is another excellent way to pay off debt. Find ways to save money in other areas and use that money to pay your loan. Saving money might mean cutting out that morning coffee or at least cutting back. It could mean reviewing your budget and removing all those streaming services. Wherever you can make realistic cuts, try it and use that money toward your loan. Every little bit counts.

10. Consider a side hustle

A side hustle gives you extra cash. Bringing home extra money can help you make additional payments and pay off your loan faster. Consider a job such as driving for a ride-share or food-delivery company that allows you to pick your own hours. Many jobs, such as freelance positions, don’t require you to leave home. 

Paying off your personal loan

A personal loan is an additional monthly expense, and some people want to remove it from their budgets before the term ends. You might yearn to pay it off quickly, and while there are options to handle this, you want to make sure paying off your loan faster does not lead to other financial challenges. You can possibly make more payments, pick up additional work, or refinance the loan. Whatever option you choose, make sure you do what’s best for you and your finances.

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