Should I Bother Paying Off My Personal Loan Early if It Has a Low Interest Rate?

If you're carrying a balance on a personal loan, you're in good company. Personal loan balances across U.S. borrowers totaled $222 billion by the end of 2022, according to data from TransUnion.

If you signed a personal loan recently, you may have gotten stuck with a higher interest rate than you wanted. That's because consumer borrowing rates have been up across the board in the wake of a series of interest rate hikes on the part of the Federal Reserve. So right now, you might pay a higher rate of interest whether you take out a personal loan, auto loan, or home equity loan.

But if you signed your personal loan a couple of years ago, you may be looking at a pretty low interest rate on the sum you owe. And that might put you in a tough spot if you've come into money recently, whether by saving it or getting a raise.

If you're facing a high interest rate on a personal loan, then paying it off early is generally a no-brainer. And the good thing about personal loans is that they generally will not charge you a prepayment penalty (though it's always a good idea to check the terms of your loan agreement to make sure).

But what if your personal loan interest rate is nice and low? Does it make sense to pay off that debt early, or should you use your money for other things?

A tough call to pay off a personal loan

Because personal loans are unsecured, often, the interest rate you're eligible for will hinge on your credit score. But if you had great credit at the time of your application and you also signed your loan before interest rates went up, then you might be sitting on a rate that's apt to make today's borrowers jealous.

In that case, it could still pay to knock out your personal loan ahead of schedule to save money on the interest you might otherwise face, even if it's not a huge amount. However, you'll also want to compare the amount of interest you're paying on your personal loan to the amount of interest you can get from, say, a certificate of deposit (CD), or from investments in a brokerage account. If you're confident you can snag a higher return on your money by putting it into a certificate of deposit or investing it, then that might be a better choice.

There's a mental component, too

You may come to the decision that paying off your personal loan early is not the best choice from a financial perspective. But from a mental standpoint, it might be.

Some people are really bothered by the idea of owing money. If that's how you feel, you may want to pay off your personal loan ahead of schedule simply for the benefit of being able to shed those payments and not have debt hanging over your head. And there's absolutely nothing wrong with going that route if it makes you feel better about your financial situation.