Case study: Vincent compares his loan prepayment options
Vincent recently inherited a large sum of money and wants to pay off a few loans he’s taken out over the years, but he isn’t sure if paying them early will be worth the expense.
Vincent decides it would be worth it to pay his first and last loan off early, but that he wouldn’t benefit from paying off the second since the amount he would save is so low. This opens up his finances so he can start investing the money he was previously spending on payments.
It depends on the lender. Many will apply any extra money toward interest first, which might not reduce the monthly cost of your loans. Some will allow you to request how the partial payment is applied – opt for principal since this reduces the amount you owe and can lower your monthly payment.
It also depends on the amount of your partial payment. If it’s close to your monthly payment, you might see a small dip in the amount you owe each month. If it’s smaller, you might not see much of a difference at all, but it can still be beneficial in the long run.
Ask how your lender applies partial payments and if it can give you an adjusted payment schedule based on the amount of your partial payment.
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Making early prepayments on your loan can save you hundreds or even thousands of dollars in interest. There’s the risk of fees, but these can be avoided by comparing your loan options before you borrow. While you may not be able to make a huge prepayment to clear your outstanding balance all at once, there are small steps you can take to pay it down faster.
Frequently asked questions
It depends on what type of interest your lender charges. If your lender charges precalculated or upfront interest, you won’t reduce how much you pay in interest. Otherwise, you will pay less in interest if you pay off your loan early.
Depending on the lender, yes. Not all lenders allow you to make more than one payment per month. One idea to consider is increasing your monthly debits so that you can pay more while avoiding any fees for multiple payment processing.
Prepayment fees vary vastly among lenders. It could be a fixed fee, a percentage of the remaining interest on the loan or a combination of both. You’ll want to talk with your loan provider to find out what you’d have to pay, though many follow the Rule of 78 to calculate your payment.
You should be able to find information about your loan in your online account portal. If there’s a specific piece of information you can’t find, contact your lender’s customer service team.
If you need money fast, you might want to go with an online lender. These are typically faster than banks, credit unions or other brick-and-mortar lenders, and can often get you funds as soon as the next business day.
- Squeeze in one big extra payment. If you get a raise or find yourself with more cash than you expected, consider putting it toward your loan. Things like your yearly bonus or an inheritance can be useful in lowering your debt. But reach out to your lender to make sure it’s all going toward your loan balance rather than interest.
However, closing an account is inevitable. You won’t be paying off your loan forever, so consider what other accounts you have open. Make sure you have a healthy mix of open accounts and long payment history to offset the closure of your current personal loan.