A personal loan is normally a fixed term agreement—you pledge to pay a given amount every month until the capital and interest are paid off. Some loans can extend over a considerable time, so what happens if your circumstances change? Perhaps you have come into some unexpected money and want to use it to help settle your loan rather than continue paying interest. Or perhaps you want to get rid of that car you bought and don’t want to go on paying for something you no longer have. Perhaps you would prefer to be saving for the next vacation, rather than paying for the last one.
Talk to Your Lender
If you want to pay down your debt quicker, you will have to start by speaking to the lender. There are many different conditions that can be attached to a personal loan, and you need to check whether paying off early is an option. Some loan conditions simply do not allow you to make any changes to the regular payment schedule or will add a substantial fee for doing so. However, it never hurts to ask, as some managers may have a bit of leeway to negotiate.
Make Additional Payments
If your lender agrees, there are several fairly painless ways to pay off your debt early.
- Divide your normal monthly payment in half and pay it every two weeks. This cuts down the amount of capital outstanding halfway through the month, and therefore the interest that goes onto It’s a small difference but it accumulates. Also, you will end up paying the equivalent of 13 months in a year.
- Round up your payments each month. It doesn’t need to be a big figure, it will make your monthly budget a bit easier to record, and it will accumulate to make a significant difference to the number of payments.
- If your income has risen for any reason, use the extra to make additional payments on a regular basis. Alternatively, if you have a sudden windfall, resist the temptation to splurge on luxury indulgences and use the money to make a one-off lump sum payment instead.
The other main route to an earlier settlement of the debt is to refinance it. Effectively this means taking out a new loan in order to pay off the outstanding capital on the old one. Remember that you may also have to pay a fee to the first lender, which will increase the amount you borrow.
You might consider a refinance deal in the following situations:
- Your financial situation has improved and with it your credit report score. This would mean that you might be able to get a deal with a lower rate of interest.
- Alternatively, your circumstances have changed for the worse and you can no longer afford the monthly sum. A refinanced deal may be able to offer you a longer period and lower payments, which could save you from facing punitive action by the lender.
- Interest rates have fallen across the board.
- You realize, too late, that you took out an unfavorable deal in the first place, and you are paying more than you need to.
- You took out a loan for a rather long period (more than five years) in order to get a lower monthly payment, but you have now decided that the important thing is to reduce the overall cost, which means a shorter term.
Among your most expensive purchases, and most likely to be bought on credit, will be your car, so there are likely to be special deals for auto loan refinance, which would be worth investigating.
As with any loan application, you need to look beyond the advertised percentage rate and compare both the monthly amount and how much you will end up paying by the end of the deal with what you will pay if you continue with your present arrangement.
You can approach your current lender to talk about a refinance deal, or go to another lender—the latter may be more competitive but you are more likely to have to pay a fee to the original lender.
A Last Word
Remember that early repayment, however it is managed, depends on the co-operation of your lender. It may be a case of ‘shutting the stable door’ now, but remember in future applications to check whether the loan comes with a flexible repayments option.
Molly Osborne has worked in the banking/finance sector for several years and is able to provide consumers with some top tips when it comes to finance matters such as mortgages, credit cards and loans.