Should You Pay More Than the Minimum on Your Personal Loan?

When you get a personal loan, you'll have a fixed repayment schedule. You'll be told how much you must pay each month out of your checking account in order to repay the loan in full by your designated payoff period. Usually, this is a period of around two to seven years, but could be longer or shorter depending on the agreement you make with your lender.

If you have extra money, you may decide you want to pay off more than the amount you're required to. But is this the right way to use your extra funds? Here's how you can decide.

What is your personal loan interest rate?

The interest rate on a personal loan impacts how much the loan costs you over time. The higher the rate you're paying, the more advantageous it is to pay the loan off early because your return on investment (ROI) is the interest saved.

The average interest rate on a personal loan was 12.17%, as of August 2023. That's a pretty high rate -- although not as high as the rate you'd pay on credit card debt (which was 21.19% as of August 2023). Many reasonably safe investments aren't really likely to consistently provide you with returns at or above that level, so paying off your personal loan early could make good sense.

If you have a personal loan at a lower interest rate, though, like at 5% or 6%, the ROI of early payoff is much lower and it may not make as much sense to pay more than the minimum on this debt.

Is there a prepayment penalty?

Most personal loans don't come with prepayment penalties among their loan fees, but some do. If your loan has a penalty for early payoff, then paying more than the minimum to free yourself from this debt may not save you as much money. The penalty would offset the interest saved, so there's little benefit to paying extra rather than just sticking to the agreed-upon payoff term.

You'll need to read the fine print of your personal loan to find out if there is a prepayment penalty, how much it will be, and when it applies to decide whether this added fee (if applicable) should dissuade you from early payoff.

What else could you be doing with the money?

Finally, you need to think about the opportunity costs of paying more than the minimum on a personal loan. Any extra money you send to this debt can't be used to pay off costlier financing (like credit card balances or payday loan debt, if you have it). It also can't be used to invest for the future, to save for a home down payment, to save for emergencies, or to accomplish other financial goals.

Sometimes, you'll decide it's worth making extra payments or paying more than the minimum because being debt-free is important or because it really is the best way to improve your financial situation over the long term. But until you ask yourself these questions, you won't know for sure if that's the case. So consider the answers before sending any extra money to your personal loan lender.