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Can I Repay My Payday Loan Early? (Pros & Cons)

By June 23, 2022No Comments
paying loan earlier

Can I Repay My Payday Loan Early? 

Yes, you are often permitted to pay off your payday loan early then you initially arranged with the lender. However, there may be certain restrictions, such as being charged an extra cost if you want to pay off your loan early.

You must contact your lender to set up an early collection if you want to pay off a payday loan early. The interest or fees you agreed to pay the lender when applying for the loan may not permanently be reduced.

What Is A Payday Loan and How Does It Work?

An unforeseen expense you haven’t accounted for may be covered with a payday, high-risk, short-term loan. Although some lenders offer additional financing, payday loans typically range from $300 to $1000.

The agreement calls for repaying the debt in full within two to four weeks after taking out the loan since payday loans are only meant to last until the next paycheck. This indicates that the loan must be paid back to the lender and the borrowing cost within a month.

It’s always a good idea to verify the implications of a payday loan on your credit score before taking one out.

Can I make early payments on my loan?

A payday loan may often always be repaid sooner than the initial date set out by the lender. Most lenders won’t charge you anything extra if you attempt to pay back any money you borrowed sooner than they had planned. Even so, because every lender has a distinct set of rules, it is always crucial to determine whether there will be fees associated with paying back your loan early.

However, some lenders may charge you a lower interest rate if you return your loan sooner than initially planned. As a result, you will end up paying the lender less than you would if you had paid back your loan on the scheduled payday.

In certain situations, whether you repay your loan as promised or if you do so early, the interest rate and costs may remain the same.

A payday loan may not be the best choice for you if you anticipate being able to repay it early after taking out the loan. A payday loan will cover unexpected expenses and get you through until your next paycheck. If this is not an emergency, you should consider alternative possibilities, such as asking your friends or family for help.

What does “early repayment” mean?

When a borrower determines they can pay off their debt sooner than they had initially agreed to with the lender, this is known as an early payback. This might include making a real loan payback or only a portion of one.

Although lenders often permit early loan repayments, reviewing the specifics of your arrangement is always advisable before signing.

What Can You Expect During the Process of Repaying Your Loan?

Most lenders require monthly payments to be paid on the same day each month (which will typically be your payday). When you take out a loan, you and your lender will agree on a repayment schedule and create it together.

You will be paying back the loaned funds along with interest due. Your loan agreement, which you will electronically sign, will always include the amount you will pay in writing.

This implies there will be no hidden costs or charges. You will pay the exact amount indicated if payments are made on schedule.

Five Questions to Consider Before Repaying Your Loan

Is paying off a personal loan early ever a brilliant idea? It is possible. The decision to reduce your monthly debt burden, save on interest, or even temporarily lower your credit score in exchange for long-term financial stability is one that only you can make.

Ask yourself these five questions if you’re contemplating an early payment to understand your circumstances and motivations better:

1. Do you need to check your credit score right away?

Paying off a personal loan early won’t probably have a severe or long-lasting negative impact on your credit score. However, there are occasions when you rely on every point of your credit score to receive a decent deal, such as when applying for a mortgage—in this case, deferring complete repayment of your loan until after your mortgage has been authorized may be a good idea.

2. Are you attempting to lower your debt to income ratio?

On the other hand, if your debt-to-income ratio (DTI) is essential for being approved for a loan, you may think about paying it back immediately. Even though your DTI does not impact your credit score, lenders, particularly mortgage lenders, consider it when assessing your loan application. Your chances of being approved are greater the lower your DTI.

3. Would it be wiser to put your money toward paying off your credit card debt?

Interest rates on credit cards are often higher than those on personal loans. Paying off credit card debt is guaranteed to improve your credit score. Some customers decide to shift personal debts to a credit card. Look carefully before deciding whether to pay off your credit cards or loan.

4. Is it safe to pay off your loan?

You could save money on loan interest if you use your savings to repay a loan. But it can also make it harder for you to handle a financial emergency if one occurs. This is less of an issue if you have a sizable emergency fund with more than three to six months’ worth of costs. If you don’t have much saved up, you may want to think twice before paying off your loan all at once to avoid jeopardizing your finances and ability to have a good credit score.

5. Does paying back your debt offer apparent advantages?

You may have calculated that you would save thousands of dollars by paying off your debt early. You’re refinancing your house and want to combine your mortgage and personal loan payments. Be sure of the advantages of early reward, whatever motivation. The only method to determine your debt is in this manner.

How Can I Pay Off My Loan Earlier?

By getting in touch with your lender and setting up a direct debit, you may repay your payday loan quicker than anticipated. This shouldn’t be a problem since, on the scheduled payday, your lender will typically collect the total amount of your payday loan and any applicable interest or fees in a single payment.

Following that, the lender should provide you with a settlement quotation that will point out any discrepancies in payments that you weren’t initially aware of.

Advantages of Paying Off Personal Loans Early

There are several advantages to repaying your loan, including:

  • avoiding paying interest
  • Debt-to-income (DTI) ratio reduction
  • reducing the anxiety caused by debt
  • Earlier debt repayment and elimination of your monthly payment

Cons of Paying Off Personal Loan Early

The following are a few drawbacks of paying off your loan early:

  • may reduce your ability to establish credit
  • Extra money received may have been saved or invested.
  • A prepayment penalty could be imposed on you.

What Happens If I Can’t Repay My Loan?

If you find yourself in the unfortunate position of not being able to fulfill your payday loan payback schedule, it may be pretty stressful.

Following-up communication from your lenders, such as calls and emails, late penalties and additional interest, and a harmful effect on your credit score, which will make it more challenging to receive credit elsewhere in the future, are the primary consequences if you are unable to return your payday loan.

If you know you cannot make a planned payday loan repayment, call your lender as soon as possible. Your lender will work with you to devise a plan that allows you to repay the loan. You may be able to agree on a more reasonable payment plan.

Does It Affect My Credit?

You’ve shown solid credit practices by not just repaying your debt on time but also early, which seems a little unfair. Don’t you deserve to be rewarded with an improved credit score?

Your credit score won’t be affected all that much. You won’t have as many opportunities to establish credit. Your credit score will increase payments if you’ve made late payments.

You forfeit the chance to make those on-time payments if you pay off the personal loan early. (On the other hand, you also eliminate the potential for late payments, which would have an even more significant detrimental effect on your credit score.)

Additionally, if all of your payments were made on time, your loan will be shown on your credit report as a closed account in good standing after you have paid it off. If so, it will continue appearing on your credit record for ten years. Your credit score will continue to benefit from it, but not as much as it did while the account was active (i.e., if you were still paying it off).

For instance, if you pay off your loan three years early, it will disappear from your credit record three years earlier and won’t positively impact your credit score.

Bottom Line

It’s often a question of better and best when deciding whether to pay off your loan early or not. Both solutions are viable. Paying off your debt will assist you if you have additional money, however, whether it is the best use of your money.

You could fare better by paying off your loan if you dislike the thought of having debt and already have an emergency reserve. On the other hand, if you’re more concerned with establishing credit and believe you can spend that money better elsewhere, then, by all means, opt to continue making the minimum payments on that loan for a bit longer.

Luke Pitt