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Paying off debt is a financial priority for many. After all, paying interest is expensive and sending money to a creditor every month isn't fun.
If you dream of debt freedom, you have to decide which loans to pay off first. You should focus on paying down high-interest debt, like outstanding credit card balances or payday loans, as soon as possible. But other types of debt have more favorable terms, so early payoff may not be smart.
If you have a personal loan, for example, paying it off early might make sense for you. But it's also possible that you'd be better off keeping the loan and making minimum payments. Ask yourself these key questions to help you decide if paying off personal loans early makes sense.
The lower your interest rate, the less sense it makes to pay off the loan early.
If you're not paying much in interest, it may not be wise to aggressively pay down your personal loan. For example, if you have a loan with a good interest rate of 5%, paying it off early would only give you a 5% annual return. You could probably earn a better return by investing in the stock market.
But if you have a high-interest personal loan, paying it as soon as possible becomes imperative. If you're paying 15% interest, for example, few investments provide a higher rate of return than paying off the loan.
Personal loans have lower interest rates than other types of debt. This includes:
If you have other debt at a higher interest rate, focus on paying that off first. Only make the minimum payments on your personal loan. Getting rid of high-interest debt will save you more money than paying off a personal loan.
On the other hand, it's usually smarter to pay your personal loan first if your only other debt is a mortgage. Mortgages come with tax breaks and lower interest rates than personal loans.
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Some personal loans have a prepayment penalty. If you pay off the loan before it's due, you'll have to pay a fee. Prepayment penalties substantially reduce any savings that come with paying off your loan early.
Compare your prepayment penalty to what you could save by paying your loan early. You may find you're better off continuing to pay as scheduled. If you'd save a small amount of money because of the prepayment penalty, do something else with your spare cash. You'll probably get a better return on it.
There's an opportunity cost to paying off a personal loan early. For example, if you're devoting extra money to your personal loans, you may not be able to get an employer match on your company's 401(k). In this case, you'd be giving up a 100% return on your investment.
Likewise, you could build a business with the money that you're using to pay off a personal loan early. Entrepreneurship can be very profitable, so you could get a higher return.
If you're trying to pay off a personal loan early and you don't have an emergency fund you may need to borrow if something bad happens. Those emergency loans will probably have a higher interest rate.
Carefully consider what you may be missing out on when you put extra cash towards your personal loan. If any of those other goals might be a better use of your limited funds, consider prioritizing them.
There's no right answer to whether paying off a personal loan early makes sense. It could be a smart move if you'd otherwise waste the cash on unnecessary purchases. But it may not be the best idea if you could be paying higher-interest debt instead or you could invest the money and get a better return.
Consider your financial goals, your financial situation, and the cost of the loan before you pay off your personal loan ahead of schedule. If there are better things you can do with your money, keep paying the minimum on your personal loan and take other steps to improve your overall financial picture. You'll become debt free eventually and could find yourself in a much better financial situation by the time that happens.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
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**Rates as of 05-31-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
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.
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If you apply online, you must agree to receive the loan note and all other account disclosures provided at loan origination in an electronic format and provide your signature electronically.
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The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.