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Can I pay back my loan early without penalties?

5 minutes minutes read

Getting a loan means that you will have to repay the money in a certain amount of time. Although, there might be a time when you happen to have the money to repay it earlier than expected, but can you repay your loan early without any penalties?

First, it is important to know that a personal loan is different from other types of debt.

Every debt is different

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It is hard to fit all the types of debt into one example that you can use for every debt you have. Your loan term, interest rates, amount and fees are all relevant information you need in order to create a debt repayment schedule.

When it comes to personal loans, your interest will depend on the amount you requested and your credit score. As we have seen before, there are some ways to build credit and improve your credit score, which will help you get better rates in the future. Regardless of your credit score, the interest rate in personal loans tends to be lower than credit cards’ interest rate, but having a better credit score will help you get a bigger amount, longer terms and lower interest rates.

Paying off a personal loan early

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You can repay your personal loan early, but you need to be careful, since there are some factors to keep in mind if you are planning to do so.

  • Prepayment penalties

If you want to pay early, you might think that you can benefit from this because financial institutions won’t have a reason to charge you if you pay their money back earlier. The truth is that financial institutions make money from the monthly interest that you are charged on your loan, so when you pay off your loan earlier, they do not make as much money as they would have if you had stuck with the payment plan they gave you. In order to compensate for that money loss, financial institutions usually include a prepayment clause in the contract you sign when you get your loan where you agree to pay a penalty if you decide to pay off your loan earlier.

This penalty is typically calculated in three different ways:

  • Flat fee: The lender sets a fee that stays fixed for the whole term, regardless of the remaining time of the loan you have.
  • Interest: A calculation based on the interest cost of the loan. This penalty varies and adapts to the time left on the loan, so the penalty will be similar to the amount you would have paid on interest if you had stayed on the repayment plan.
  • Balance: In some cases, especially with larger amounts, financial institutions decide to charge a penalty, which is a percentage of the remaining balance of the loan. This is not typical for personal loans, but it is good to keep it in mind just in case.

Paying off your loan might not be the best decision if your lender has a prepayment penalty fee, but there are other options and some financial institutions that don’t have this fee. Remember that every lender has to disclose if they have a prepayment penalty on the loan information. At Crediverso, you can compare different loans and choose the one that fits your needs.

You can also avoid paying the prepayment penalty fee by contacting your lender, and you might get an offer from them to pay off your loan slightly earlier. Although, take a look at the penalty since it can be lower than the remaining interest you have to pay on the loan. Some other lenders set the interest to be lower at the end of the loan term, so you will be gradually paying less as time goes by. Finally, you can see if the financial institution allows partial payoff without penalty. This means that you might be able to pay off some of the loan’s amount early every year without incurring any fees regarding prepayments.

Keep in mind that every decision you make affects your credit score in a positive or negative way. Getting a loan means that you have one more account open, which improves the credit mix you have and your credit score as well. So, when you pay off a loan, it will be shown as a closed account on your credit report and you will have less open accounts, hurting your credit score slightly. Nothing big to worry about though, just something to keep in mind when you are making a decision on your loan. Also, by paying off your loan early, your average credit history length might lower. The impact on your credit score will depend on your credit profile, and it will not impact everyone the same.

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Arturo Mendez

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