- Check out refinancing. A series of on-time payments will improve your credit, and with an improved credit comes the opportunity to get a better interest rate. Consider refinancing your loan or consolidating your debt to lower your monthly payments.
- Cut expenses. Look at your monthly budget and find areas to cut back, even if it’s simply adjusting your thermostat or cutting cable. Read our guide to budgeting to find some more ideas.
Before you start applying any of these tips, make sure your lender allows you to make extra payments without additional charges and that you have enough extra income to cover what you’re spending.
It depends. Some lenders will penalize you for paying off your loan early as a way to make back a portion of the interest you would have paid if your loan had gone to term.
Prepayment penalties
Prepayment penalties or exit fees are usually included in the loan contract before you sign, so if you know you’re going to be paying early, avoid lenders that charge these.
Typically, a prepayment penalty is a percentage of the loan balance you’re paying off. So the sooner you pay off your loan early, the larger the penalty you pay. Lenders apply this so they don’t lose on the lost interest payments.
Precomputed or add-on interest
Since there are plenty of lenders that don’t have prepayment penalties, it’s in your best interest to also research ones that don’t precompute your interest. Also known as add-on interest, this is where lenders calculate the amount of interest you’ll pay over the life of your loan and add it to the principal.
It might seem convenient, but it will cost you more if you decide to pay your loan early. An interest refund will be given to you, although this still won’t be as cheap as finding a loan that accrues interest daily rather than including it all as one lump sum. Continue reading “Are there penalties for paying off my loan early?”