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How To: Pay off an Installment Loan Early

Finding simple ways to budget to pay off your installment loan early can seem difficult, but we've put together a list to help you get started, as well as a discussion of whether paying off your loan early is suitable for you.

Loans can be incredibly helpful when you need a sizeable chunk of change fast, but the constant monthly payments with interest can become exhausting after a while. Don't you wish there was a way to speed the process up and be done with your loan early?

Paying off an installment loan early is easier than you may think, but it’s important to educate yourself on the benefits and pitfalls of doing so. Loans and interest rates vary from person to person, so what is right for someone else may not be right for you.

Read on to learn everything you need to know about paying off your installment loan early!

What is an Installment Loan?

You're probably more familiar with installment loans than you realize, even if you’ve never heard the term before.

Any loan that is for a fixed amount, that is also paid off in fixed amounts, is an installment loan.

These monthly payments are known as installments.

Some of the most common types of installment loans are mortgages, student loans, and auto loans.

Why Should You Pay Off Your Installment Loan Early? 

Paying off your installment loan early can be beneficial for a multitude of reasons, the most obvious being the space it frees up in your monthly budget. But is paying off an installment loan a wise decision?

The truth is that whether paying off your loan early will be problematic depends entirely on your lender. Some lenders are willing to help you pay off your installment loans early, while others may make it as difficult as possible by imposing steep penalties and fees.

Whether or whether paying off your debt early is a smart option depends on you and your financial condition. It can be a terrific approach to get rid of one unwanted item from your monthly budget, just make sure it won’t affect you negatively.

Prepayment Penalty

Most lenders are going to charge what is called a prepayment penalty, which is a monetary penalty meant to outweigh the money the lender would lose from not receiving the interest that you pay on your loan month to month.

In some cases, the prepayment penalty is insignificant enough that you will still profit from the lower interest rate in the long term, but in others, the prepayment penalty can cost you more than the remainder of your interest. When choosing whether an early payment is the best option for you, it's critical to check your math.

Credit Score

Aside from the need for a large sum of money upfront, the most significant advantage of a loan is the boost it provides to your credit score when you consistently pay on time. So, if you pay off your installment loan early, what happens to your credit score?

Paying off your installment loan early won’t hurt your credit, but it won’t help it either. When you are actively paying on a loan, that loan is considered an open account, but once the loan is paid off, it becomes a closed account.

Closed accounts do not help your credit, but open ones that are consistently paid on time do. That's not to imply that closed accounts are harmful to your credit; rather, they do nothing to it at all. Paying off your debt early may not be the best option if you want to continue to improve your credit.

A healthy credit history opens tons of doors that might be closed to you with a mediocre or bad credit history. Don’t take the positive impact of regularly paid installment loans lightly!

Saving on Interest

When you pay your loan off early, you can save a significant amount of money in interest, especially if your loan was long-term or had a higher than the average interest rate.

One of the disadvantages of paying off your loan early, as previously indicated, is that the prepayment penalty imposed by some lenders can be as much as, if not more, than the interest you would save by closing your account early.

If you do decide to pay off your loan early, put the money saved on something that will benefit you in the future, such as a retirement fund or an emergency fund. Creating a solid safety net can help you avoid taking out high-interest installment loans in the future.

Ways to Easily Pay Off Your Installment Loan Early

It's difficult to find a few more dollars in your monthly budget, much less enough to pay off your installment loan. Do not be concerned! We've prepared a list of innovative ways to save and earn money.

It's crucial to note that clearing your installment loan ahead of time should never put you in a bind with bills or other necessary payments. When making judgments about your installment loan, it's important to think about all of your financial obligations.

Round-Up Your Installment Loan Payments

It's tempting to pay the bare minimum on your monthly installment loan. There are moments in our lives when every penny matters and paying more than is necessary seems agonizing.

The truth is that if you merely pay the minimum amount due on your installment loan, you aren't really making any progress toward paying it off. Spending just a little more each time will put you way ahead of the game.

It's simple to do this by rounding up to the nearest $10 figure. Simply adding that extra payment is a great way to get your plan for paying off your installment loan early off the ground.

If you think making extra monthly payments is too tough to remember, rounding up or simply paying extra each month will help. You'll still just have to pay once a month, but you'll be making work toward paying off your loan as quickly as possible!

A debit card that rounds up your purchases to the nearest dollar amount and deposits the savings into a separate account is a similar notion. These nickels and dimes will rapidly build up and can be utilized as a supplement to your monthly installment loan payment.

Make Extra Payments on a Schedule

Making numerous payments a month is the best way to pay off your debt early if you're a little more organized and can handle adding another payment to your monthly plan.

There are a few ways to go about this:

  • Schedule a recurring payment date for a certain day each month
  • Make an extra payment when you receive your paycheck
  • Make an extra payment once a week

If you keep a written or digital planner, mark these extra payments down just as your would the payments scheduled by the lender. Try to get into the habit of treating these extra payments just like the required ones.

Take on Some Extra Jobs

If you don't have enough money in your existing monthly budget to make extra payments on your installment loans, picking up a couple extra jobs might be the way to go. Don't worry, this doesn't have to imply starting to give up all your free time.

A few simple jobs and ideas to put some extra money aside for your installment loans are:

Food Delivery

Gig work is an outstanding way to earn additional money, but money earned in the gig economy is also taxable income, so keep that in mind when budgeting.

The gig economy has exploded recently, and one of the biggest facets of this new form of work is food delivery.

Food delivery gig work is an excellent choice for extra installment loan money since most of these jobs allow you to work on your own schedule. This way, earning a little more doesn’t have to interfere with your primary job, and once you’ve made enough to meet your goal, you can take it easy.

There’s also the added benefit of tips for a job well done. Who knows, maybe you’ll even have a little pocket change for yourself once you’ve set aside your loan payment!

Personal Shopping and Package Delivery

If the constant in and out of food delivery isn’t for you, personal shopping, especially personal grocery shopping, is a great option. You’ll spend most of your time in a cool, air-conditioned store shopping for others, and like food delivery, you can choose when you want to work.

 This is a low-stress side job that will allow you to set some money aside and get your installment loan paid off early.

Like personal shopping, package delivery gig jobs are taking off too. These types of shopping jobs may rely on more driving than the others, but employees are commonly paid more to compensate for the miles driven. Quick and accurate deliveries can net you some significant tip money!

Downsizing by Selling Unwanted Items

Platforms like Facebook have built-in user sales areas, making it easier than ever to get rid of unwanted items. You can not only declutter your home by selling items like an extra coffee maker or some jewelry you don't wear anymore, but you can also use the money to pay off your installment loans.

If you choose to use platforms like eBay, just be conscious of shipping charges when listing your item for sale so you get the most bang for your buck.

Shipping large things are going to be expensive, so having delivery fees included in the purchase price will ensure that you don't end up paying more in shipping than you got on the sale!

You could also go the classic route and have an old fashion yard sale. You might be surprised at how quickly the sales of your unused items add up!

Refinancing Your Installment Loan

While you would usually refinance a loan with the goal of having smaller payments over a long period of time, you can also refinance with the goal of paying off your loan sooner. If your credit has improved in the time since you initially got your loan, refinancing can lower your interest rate and enable you to pay the loan off early. 

Basically, if your monthly payments are excessive due to a high-interest rate, it will be difficult for you to pay them at all, let alone pay more on them. If you refinance to acquire a lower interest rate and a lower monthly payment, you'll be able to pay more without putting a strain on your budget.

The most important point to remember is that refinancing will not save you money if your interest rate rises or stays the same, as this negates the purpose of refinancing in the first place.

Using a Portion of Your Tax Return

Millions of Americans look forward to the lump sum of a yearly tax return, but if you get a large refund, it might be in your best interest to put that money toward paying off your installment loan early.

If you don't want to, you don't have to hand over all of your tax returns. Any amount you can spare will help you pay off your installment loan ahead of schedule in the long run.

In Conclusion

 Paying off your installment loan early doesn’t have to be a pain! Try some of these tips to increase the monthly amount you put towards your loan and you’ll have that monetary weight off of your shoulders in no time.

Some of our favorite tips to paying off your loan early include:

  • Rounding up your payments
  • Making extra payments on a schedule
  • Taking side jobs
  • Downsizing
  • Refinancing
  • Using your tax return

Sit down and carefully analyze the risks and benefits of paying off your installment loan early, just as you would with any major financial choice. Make sure you're saving money by doing the math, and you'll be able to make the best decision for yourself.

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