How Extra Payments Affect Future Personal Loan Payments

Extra payments toward your loan's principal (or the amount of the loan) can reduce the total amount you repay by reducing the total interest you pay. When you make extra payments, you can also reduce the loan's terms and pay your debt down faster. It can also lower the amount of your future monthly payments.

Let's take a look at what you need to know about how extra payments affect future loan payments.

Advantages of Making Extra Payments on Your Loan

One of the biggest advantages of making extra payments on your personal loan is that you can save on total interest. When your extra payments reduce your principal, the amount of interest you're charged (based on the principal) is also lower.

In addition, extra payments shorten the amount of time you're in debt. If you want to get out of debt faster, extra payments can reduce the time it takes to pay down the debt. When you have your loan paid off, you can put the money you were using to make extra payments toward paying down other debt or other financial goals like saving for retirement.

You can use a personal loan calculator to determine potential savings and to compare different extra payment amounts.

Disadvantages of Making Extra Payments on Your Loan

When considering whether to put extra money toward paying down your loan early, consider the possible downsides.

Check whether your lender charges a prepayment penalty if you pay off the loan sooner than the original loan term. Some lenders charge a fee when you don't keep the loan until the end of the term. Then, use a loan calculator to check whether the amount you would save in interest by making extra payments would offset the prepayment penalty. You might find that it's worth paying the penalty to be out of debt sooner, especially if you would still have interest savings left afterward.

Another minor consideration is how long a personal loan stays on your credit if you make extra payments. Monthly payments are reported to credit bureaus, which can help your score. Additionally, keeping the loan can contribute to a longer credit history. In fact, in some cases, your credit score might drop after you pay off a loan. However, generally paying down your debt is more beneficial to your credit history than paying a loan reliably for a few months longer.

Finally, think about how your personal finances might be impacted by the extra payments. If putting extra money toward a loan means you cannot pay other bills, this strategy can do more harm than good. Or, perhaps you could put the extra money toward an investment that could earn you more than you would save in interest by making extra payments.

You could also use extra money to build an emergency fund, which can ensure you're able to afford an unexpected major expense, such as a hospital bill or car repair bill.

Tips to Help You Pay Off Personal Loans Early

If you want to pay off your personal loan early, you can take specific steps that should make the debt repayment more manageable. These include:

• Make biweekly payments: Instead of making monthly payments, consider simply making payments every other week. This will result in what amounts to an "extra" payment each month, accelerating your debt payoff. You can also add an additional payment to your biweekly payments. For example, if your monthly payment is $300, and you could put an extra $100 each month toward your debt paydown, consider making biweekly payments of $200.
• Cut back on unnecessary spending: You may find extra money to pay down your loans by reducing your spending. Review your budget and find places where you can cut costs, such as by eating out less or spending less on entertainment.
• Increase your income: Look for ways to make extra money. You may earn more by, for example, picking up extra shifts at work, getting a part-time job, starting a side hustle, or selling unused items. Put any extra money toward reducing your debt's principal.
• Refinance your personal loans: Another solution is to refinance your loans. If you can get a new loan with a lower interest (and a potentially shorter term), you can save on interest and pay off your debt sooner. Just make sure you have a plan to pay off your debt before you refinance.

Extra Payment Calculator

Using a personal loan calculator can help you get a sense of how much you could save over the life of the loan—and how quickly you can pay it off—by making extra payments.

For example, let's say you have a $10,000 loan with a term of seven years at a 15% interest rate. Your monthly payment would be $192.97. The total interest you'd pay on that loan would be $6,209.27.

If you want to pay off the loan faster, you could put an extra $100 toward the loan each month. With this plan, you could be out of debt in a little less than four years and save more than $3,000 in interest. With these extra payments, you'd be saving money in interest and be out of debt faster.

The Bottom Line

Having a personal loan results in interest payments and can cost you more money over time. Paying down your debt faster can potentially save you hundreds of dollars in interest while reducing the amount of time you spend in debt. However, before you devote a large portion of your budget toward making extra payments, make sure you have sufficient financial resources and a plan for reaching your other financial goals.