Do's and don'ts of repaying your personal loan early

What you need to know before writing the final check to your personal loan. (iStock)

Personal loans are the fastest-growing type of consumer debt. They can be an effective way to consolidate other forms of debt or to pay for an unplanned expense, like pricey home improvements or a car repair.

In fact, more than 20 million consumers have a personal loan. If you're among the ranks, you may be in a position to pay your personal loan off early, using the government stimulus check or money you've been saving by cutting back in other areas of your budget, such as fuel or entertainment.

Before you decide to pay off your loan amounts early, consider these do's and don'ts when it comes to a personal loan.

Do be sure you can cover your monthly payments

Be sure your budget can cover essential expenses, like housing, utilities, and groceries. You'll also want to stay current on other loan amounts, especially mortgage loans or an auto loan. If you fall behind on secured loans those, you could risk losing your home or automobile. Make sure you can cover those bills and still have money left over to pay off the personal loan.

Don’t drain your savings account

If you took out the personal loan due to an unplanned expense, you’ll want to have an emergency fund in place, so you don't run into a similar situation down the road. It may feel good to pay off a loan early, but if you lose your annual income or have another unexpected emergency, having extra money in your savings account might be better for your personal finance. A good rule for building an emergency fund is to have three to six months' worth of expenses saved. In today's uncertain economy, paying off a personal loan, especially an unsecured one, may not be the most critical need for your available funds.


Do check the terms of your loan

Understand the terms and requirements of your personal loan if you plan to pay the debt early. Some lenders charge a fee for paying off your loan early to ensure that they make money off of your loan. You will want to confirm that yours does not. If your loan does have this term, visit Credible’s personal loan calculator to determine how much interest you could save by paying off the loan before its maturity date. Then weigh that against the penalty you'll incur to decide if it's still the right decision.


Don’t tap into retirement to pay off a personal loan

The average personal loan has an annual interest rate of six to 36 percent. If yours is on the higher end, you may be considering taking money out of your retirement savings to pay it off. Before you cash out some of your funds, consider the consequences. Retirement accounts have an age requirement for making withdrawals. If you’re taking funds early, you could incur hefty penalties. And with today’s volatile market, you may be selling investments at a low price. You may also be considering pausing your retirement contributions and using the money to pay off your personal loan. Your loan isn't an investment that will pay you benefits in the future. It may be a better choice to stay the course and pay your personal loan with other forms of cash.

Do have a plan for the extra money

Paying off debt feels good, and you can use the cash you freed up by eliminating a monthly payment to accomplish other financial goals. Maybe your dream is to buy a home? Or perhaps you want to pay off other loans and become debt-free? If you have other forms of credit, you can use the snowball method to pay something else off, taking the amount you were paying on the personal loan and applying it to another bill. This could help build credit and your credit score may even improve when you reduce your credit card debt, especially if your personal loan was a large one. Use the momentum you may be feeling and apply it towards your next goal. Improving your credit score and ensuring you have a strong credit history is important for loan approval -- whether you're seeking mortgage loans or beyond.


Paying off a personal loan early can be a good choice if your personal finance is secure. It takes discipline and hard work to pay off a debt early. Do be sure to celebrate the win. And if you need any more advice, consider seeking a financial advisor.