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Paying off a loan early is something a lot of us aim for to free up our finances and help avoid additional interest, but you could be setting yourself up for penalties by clearing the balance before the loan term has come to an end.

Here are some pros and cons of paying off a loan early so that you can make an informed decision on whether that’s the most financially viable option for you.


You can pay off a loan early to avoid interest that you would have accrued if you’d have seen out the loan term with regular repayments.

Paying off a loan early allows you to spend or save the amount you would have been using to service the debt that you’ve just paid off, making it easier on your month-to-month finances.

You can reduce your debt to credit ratio by paying off a loan early, which in turn can help to improve your credit score.

Some lenders will allow you to pay off your loan early to avoid interest and not pay any fees or penalties, but you will have been told if this was the case when you initially took out the loan in the first place.

If you’re considering taking out a loan with the aim of paying it off early, you can compare loans and seek out lenders who won’t charge you an early repayment fee.

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If you’re attempting to pay off a loan early to avoid interest, you might find that your financial resources are stretched as you try to gather together the funds to clear the balance before the final payment date.

Any savings or emergency funds may be depleted, so you won’t have any financial backup should any unexpected situations arise that call for instant access to funds.

If your credit score isn’t great, you would actually benefit from keeping to the loan terms, as it shows that you’re able to pay back the instalments over an agreed period of time.

Dependant on the interest rate of your loan, you may be far better off clearing the balance on another loan or credit card if these debts are costing you more money in the long-term. Review your finances before making a decision as you could be saving more on interest repayments elsewhere.

Some loans include early repayment fees and penalties that could actually cost you money if you wanted to repay your loan early.

The decision to pay off a loan early or to continue to keep making regular instalments very much depends on your current financial and personal circumstances, any other debts you may have and any fees or penalties you may face for early repayment. Think carefully before you decide to clear a loan balance early.

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