If you get a personal loan, you can do many things with that money. For instance, you can use it for essentials such as paying bills. You might use that cash for home improvements or to purchase a new vehicle.

You should also know about personal loan myths. One is that it's unwise to pay off one of these loans early. That's not necessarily the case, though there are some possible disadvantages if you use this strategy.

We'll discuss what you should know about paying off personal loans early in the following article.

What is a Personal Loan?

First, let's discuss what we mean by "personal loan." This is typically a loan that's offered to you by a bank or credit union. You will have a set repayment period, during which you must make monthly payments.

These payments are sometimes called installments. You must pay interest on the loan as well. Interest payments are the primary way the lending entity makes its money.

Prepayment Fees

Some lending entities prefer that you don't pay off your loan early. They want you to pay during the designated period. That's how they will get you to give them the maximum amount of interest on the money you borrowed.

If you pay off the loan early, the lending entity will charge you what they call either a prepayment fee or an early payment fee. If you're considering taking this step, see whether your loan comes with one of these fees. You should see that stipulation if you look at the loan details. 

If the loan does come with one of these fees, you should calculate whether the interest you must pay for the remaining months is more than that number. If it's cheaper for you to pay the early payment fee instead of what the interest will cost you, you can move ahead with the early repayment.

Savings

You might see that you have the money to pay off a loan early if you've been making plenty of cash at work and living frugally. However, it might not be the best idea to pay off your loan early if doing so will leave you with virtually no savings.

If you know you'll have little or no money in savings if you pay off your loan early, it's probably best not to. You want to retain a financial cushion, just in case you get hit with a big, unexpected expense. 

Monthly Expenses

You probably consider your monthly expenses, such as rent, utility bills, and your food budget, to be essential. You know that you need the money for all of that if you're going to continue living comfortably.

You might see that you have enough money to pay off a loan early, but you shouldn't do that if it won't leave you with enough cash to cover your monthly expenses. Sacrificing money for utilities or rent to pay off a loan early isn't financially responsible. 

Paying Off a Loan Early Makes Sense Sometimes

Some people get into a situation where it's sensible to pay off a personal loan early. However, you should only do so if you still have enough money left over in savings to cover you in the case of a sudden large expense. You should also have enough cash to pay all of your monthly expenses, such as rent and utility bills. If you don't, it's best to pay off the loan according to the schedule set by the lending entity.

You must look into whether your loan comes with an early repayment fee. If it does, only repay the loan if that fee is less than the cost of your remaining interest payments.

By following these guidelines, you can determine whether paying off your personal loan early makes sense for your particular situation.