Depending on your lender and terms, paying off a personal loan early can mean saving on interest and freeing up money in your monthly budget. Prepayment has pros and cons. The benefits can include interest savings and early freedom from debt, while the drawbacks can include prepayment fees. Citi charges no prepayment fee for applicants approved for a Citi® Personal Loan.
Let’s look at some tips to maximize your payments, as well as the upsides and downsides of paying off a personal loan before the due date.
Make extra payments when possible
Even if you can’t make extra payments every month, the occasional additional payment can help you pay off your personal loan faster.
You can even make a principal-only payment, which directs extra money to the loan principal and reduces your outstanding balance. Chipping away at the principal early in the repayment period can significantly reduce the interest you pay. Just ensure the lender allows principal-only payments and knows the extra money should go toward the principal.
Reevaluate your budget
Reevaluating your budget can free up money for additional debt payments. See if you can cut back on non-essential spending like dining out or subscriptions.
Use autopay
Setting up autopay can simplify your finances and help you save money. Automatic payments ensure that your money reaches the lender on time – and you don’t have to keep track of payment dates. Some lenders, including Citi, offer a discount to personal loan customers who enroll in autopay when they take out a loan.1
Know whether your loan comes with prepayment fees
Some lenders charge borrowers a prepayment fee for paying off their loan before the term ends.
Not all lenders charge a prepayment fee, but it’s worth checking to see if yours does. Citi, for example, does not. Read the loan agreement or contact your lender to find out. You may decide to pay the loan off ahead of schedule anyway, but it's important to know exactly how much you’ll pay.
Consider debt consolidation
Debt consolidation lets you shift existing debt to a new loan. You take out a new personal loan (some lenders call these debt consolidation loans) and use the money to pay off existing debts, effectively rolling several monthly payments into one. You can use debt consolidation to speed up the repayment process by opting for a shorter term. Citi does not allow customers approved for a Citi® Personal Loan to use the funds to pay off existing Citi credit cards.
Debt consolidation can be a good option if you can save money on interest over the life of the loan. It can also make sense if you have additional debt, such as outstanding credit card balances. Remember, the better your credit, the more likely you are to qualify for a lower interest rate.
Use your savings (wisely)
You can tap into your savings to make extra payments on your loan. That said, remember to leave yourself a cushion. An emergency fund can help you manage unanticipated expenses without taking out more debt.
Reasons to pay off a personal loan early
Benefits of repaying your loan early can include:
- Save on interest: Paying your loan off early can mean you’ll pay less interest overall.
- Freedom from debt: Becoming debt-free means no more monthly payments. You’ll have more money for other things, like savings or travel.
- Lower your debt-to-income ratio (DTI): Lenders consider your DTI when you apply for loans or credit. Getting rid of existing debt may help you qualify for better terms and rates.
Reasons not to pay off a personal loan early
There can be drawbacks to repaying your personal loan early, including:
- You may use up your savings: If making extra payments eats away at your savings, this can cause problems later. Not having an emergency fund may mean taking on more debt if you’re hit with unanticipated expenses.
- You have high-interest debt: If your other debts have higher interest rates than your personal loan, it can make sense to pay those off first. You’ll save more in interest if you focus on paying off the higher-interest debt while continuing to make on-time personal loan payments.
- Prepayment fees: Though not all lenders charge prepayment fees, it helps to check if yours does. If you repay your loan ahead of time, prepayment fees may affect your interest savings. So, it may make more sense to tackle a different debt instead.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
1 There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the interest rate. If you are in default, your APR may increase by 2.00%. No down payment is required. Rates subject to change without notice.
