Lines of credit, mortgages, student loans, car loans…
There are lots of ways to borrow money, and they all come with a cost: interest. And the longer it takes you to pay off your loan, the more interest you’ll end up paying.
On the other hand, the sooner you pay off a loan, the less interest you’ll pay. Paying off a loan early is totally possible. It can save you money, reduce stress, and give you more control over your financial future.
If you’re thinking of paying off your loans early, you’ll first need to decide if it’s worth it. Sometimes, paying off a loan early can actually end up being more expensive.
Let’s take a look at when it makes sense to pay off a loan early, which loans to prioritize, and our strategies for how to pay off a loan faster.
A Quick Look at Debt in America
Before we dive in, here’s a quick snapshot of the American debt landscape. You may not think of your loans as a debt, but the truth is all money owed is a form of debt.
What does this all mean?
It means if you have debt, you’re not alone. Fortunately, if you want to break free from it you can. But before we share our strategies for how to pay off a loan faster, let’s take a look at when it makes sense to pay a loan off early and when it may not.
Is it worth paying off a loan early?
Generally, yes. But not always.
Depending on your loan term and amount, paying it off ahead of schedule can save you money on interest and free up room in your monthly budget. But in some cases, it may not be the most strategic move.
When Early Payment Makes Sense
- You’ll save significantly on interest.
- Your budget can comfortably support extra payments.
- You’ve already built up an emergency fund and paid off higher-interest debt (like credit cards).
- You want the peace of mind that comes from fewer monthly obligations.
If those boxes are checked, early repayment is likely a solid choice.
When Early Payment May Not Make Sense
Prepayment Penalties
Some loans, especially mortgages and auto loans, come with prepayment penalties. These penalties vary by lender and loan terms. If the penalty is higher than what you’d save on interest, you’re probably better off sticking to your original repayment schedule.
Missed Financial Opportunities
Paying off a low-interest loan early might feel satisfying, but it could mean missing out on higher-return opportunities. For example, it might be a better idea to contribute more to a retirement account, pay off high-interest credit card debt, invest in a business or education, or build a robust emergency fund.
If early repayment means draining cash reserves or skipping long-term investments, it may not be the best use of your money right now.
Temporary Dip in Your Credit Score
Paying off a loan can slightly lower your credit score in the short term, especially if it’s your only installment loan or an older account. This usually isn’t a big deal unless you’re about to apply for a mortgage or large loan. In most cases, your score will bounce back.
Straining Your Monthly Budget
If making extra payments means you can’t afford essentials, like food, rent, or bills, it’s not worth it. Prioritize your financial safety net first. That includes covering your monthly necessities and building an emergency fund. You won’t get ahead financially by putting yourself in a vulnerable position.
Which Loans Should I Pay Off First?
It depends on your goals:
- Want to save the most on interest? Pay off high-interest loans first.
- Need quick wins to stay motivated? Pay off smallest balances first.
- Want a balanced approach? Combine both or consolidate your debts.
Each method has pros and cons. But it’s good to know you can flex repayment to your circumstances. Ultimately, the best plan is the one you’ll stick to.
How to Pay off a Loan Faster
Paying off a loan early can be a great move. If it makes sense after you’ve considered your loan terms, financial goals, and overall budget, here’s how you can do it:
1. Make & Commit to a Realistic Repayment Plan
This is your foundation. It will help you get into the right mindset, set expectations, and keep you organized and focused on your goals. Plus, writing your intentions down and tracking your progress will increase your chances of success.
The exercise of planning and documenting may also reveal areas of untapped savings or financial resources that may turbocharge your early repayment plan. Having a clear plan also makes it easier to say “no” to unnecessary spending and “yes” to getting debt-free faster.
2. Automate Your Progress
Setting up autopay for your regular loan payments helps you avoid missed due dates and late fees, which can slow you down. But you can also automate extra payments, for example, scheduling an additional $50 toward the principal each month.
The key is automating with intention. Let technology help you stay consistent and focused.
Valley Credit Union’s online and mobile banking, and online bill pay make it easy to schedule payments your way.
3. Pay More Than the Minimum
This is one of the most powerful ways to speed up repayment. Paying just the minimum keeps your loan on track, but paying extra directly chips away at your principal.
You could try rounding up each payment (e.g., from $227 to $250) or adding a flat amount like $25 to every payment. You could also commit any extra money you receive like your tax refund or money from a side hustle to paying off your loan.
Another way to pay more is by freeing up money you’re already spending elsewhere. Small changes in your day-to-day habits can add up fast.
Look for places where you can trim or pause spending, like:
- Streaming services or subscriptions you rarely use
- Takeout or coffee runs that could be scaled back
- Impulse shopping or frequent delivery fees
Then, redirect those dollars toward your loan balance. You don’t have to eliminate all your fun spending, but if paying off a loan early is a priority, you need to be intentional about where your money goes and spend responsibly.
4. Make Biweekly Payments Instead of Monthly
Split your monthly payment in half and pay that amount every two weeks. By the end of the year, you’ll have made 13 full payments instead of 12, without feeling a big difference in your budget.
This method works especially well if you get paid biweekly and want your payments to align with your pay schedule.
5. Consolidate Your Loans
Consolidation might help if you have multiple loans. Consolidating your debt into a single loan can cut your financing costs and simplify the administration of your repayment plan. In some cases consolidating your loans may even lower your total interest cost.
You can use our debt consolidation calculator to see if this option makes fiscal sense for your situation.
6. Make a Lump Sum Payment
Big payments can make a big difference.
If you receive a work bonus, tax refund, inheritance, or even sell some unused items, consider applying that money directly to your loan principal. Let’s say your loan balance is $5,000 and you typically pay $300 per month. A $2,000 lump-sum payment could shave months, or even years, off your repayment timeline.
7. Refinance Your Loan
When you refinance, you replace your current loan with a new one. During the process, you’ll have an opportunity to negotiate better terms — ones that can lower the total length and cost of your loan. This is especially true if your credit has improved since you first borrowed, or if you refinance through a credit union that’s incentivized to do what’s in the best interest of its members.
Got Loan Repayment Questions? VCU Can Help!
Understanding the ins and outs of loans and debt repayment is a big deal. Fortunately, Valley Credit Union has a talented team on hand to assist you with financial planning, answer questions about making payments, and so much more. We also have several helpful articles and other resources on these topics.
Ready to get serious about your loan? Let us know how we can support you.
About the Author
Justin Roberts, Vice President of Lending
Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.