So, your credit score is nothing to write home about and you really need (or want) that large purchase. You can fit a personal loan payment in to your monthly budget, and making timely debt payments helps to improve that credit score, so that you can eventually write home about it! But, you cringe at the thought of how much that item will ultimately cost with the interest payments on your loan.

What you may not know is how paying off your personal loan early can dramatically lower the interest cost and, thus, lower the cost of that big-ticket item you’ve purchased. Let me explain.

Most personal loan lenders do not penalize you for paying off your loan early. Let’s say you take out a 36 month $4,000 loan knowing that your currently monthly budget allows for this payment. If the interest rate is 14.99%, your monthly principal and interest payment will be $138.64. Obviously, this sounds a lot better than putting down $4,000 up front. But, over 36 months, you’ve paid $991 in interest costs. It’s called the cost of using other people’s money! There’s nothing wrong with it. In fact, it’s what makes our economy hum. Without credit and loans, we would all be in a very different place, economically.

Your life is not static over a three year period and economic conditions can and do change. You may start making more money. Perhaps you finished paying down another financial obligation. You may have received a tax refund. Or, maybe you lowered a rent or mortgage payment. What I’m getting at is if you can make an additional payment or two or three during the term of the loan or even make a lump final payment in month 18 or 24 rather than taking all 36 months to pay, you can significantly reduce that $991 in interest cost.

Using a loan payoff calculator, you can try different scenarios to show you how.  Enter the loan amount, interest rate, and loan term from the example above and you’ll see the $991 in interest payments. Now, click on “Add Extra Payments”. Let’s say you make two additional $500 payments annually starting five months in to your loan. This will reduce your interest cost by 30%! Perhaps you can payoff your loan with a lump sum after 18 months. This will reduce your interest cost by 28%.

You see, there are ways to get what you need or want today, pay over time, and still minimize the cost of interest all while improving your credit score. Follow this method and you can master your financial obligations.

~ David Weyher