Early loan repayment not only allows you to save money but it can help you achieve the financial stability and freedom that you deserve.

From payday loans of just a few hundred dollars to long term commitments made on home loans, we’re going to take a look at when it’s a good idea to repay your loans early and when it’s not.

Which loans should I repay early?

Making extra repayments on any loans and lines of credit that you currently have will save you money in the long run but, some may have early repayment penalties which you may want to look out for.

We’re going to start off with small payday loans and work out way towards the largest debt most of us carry, our mortgage.

We will look at early repayment on the following forms of credit:

  • Payday loans,
  • Other short-term loans,
  • Credit cards,
  • Car loans,
  • Personal loans, and
  • Home loans.

Which loans should I repay early?

Paying your payday loan off early

Payday loans have the shortest loan terms, from a week to a month and most people that take them out are simply unable to repay them early.

That being said, if you really want to repay your loan before the repayment is due, many lenders will allow this completely free of charge. You will not save any money by repayment a payday loan early. This is generally why it’s almost always best to make your repayment as agreed.

Paying off short-term loans early

Short-term loans can have loan terms ranging from one month up to six and generally carry a high rate of interest. Early repayment on short-term loans generally carries penalty fees and it is therefore important to check your loan agreement prior to making additional repayments or paying the loan off entirely.

If you do not have many debts, you loan agreement specifies exit or early repayment penalties, if you are new to credit and are looking to build a credit history or are carrying a relatively small balance on your short-term loans you should not repay early.

Paying credit cards off

One of the best financial moves anyone can make is to pay more toward their credit card balances than what is required. Not only will you save on the typically high rates of interest charged but you will reduce your outstanding balance and have access to extra credit if needed. You can also improve your credit score by making additional payments and help fix your bad credit rating.

If you’re having trouble keeping up with multiple credit cards and multiple balances, you may want to apply for a balance transfer credit card which will allow you merge multiple credit card balances and enjoy an interest free period during which you can attempt to repay the entire balance.

Repaying you car loan off early

When it comes to vehicle finance, putting down a deposit on your car is the smartest way to save in the long run but for those that did not put down a deposit you may be considering repaying you car loan off early.

Early car loan repayments in Australia

Car loans are very personalised and it’s always necessary for you to contact your car loan provider to find out whether you can make early repayments or pay off your car loan entirely.

Generally speaking a car loan is expensive and carries high instalments. If you have other high interest debts such as credit cards, you will save more money by paying those off first.

In addition, if the interest on your car loan was pre-computed, as most are, you will not be able to save by making extra payments. This is because the interest is calculated overall and added to your monthly repayments which means you are repaying the principal and not reducing the amount of interest you’re being charged.

Consider refinancing your car loan

Refinancing your vehicle loan may help you attain a lower interest rate (if your financial circumstances have improved and you’ve maintained a strict budget) and even reduce you loan term. A reduced loan term will make your regular loan repayments larger but will help you pay off your car loan sooner and save you money.

Early repayment on personal loans

Just as with any other type of loan in Australia, we need to find out whether our loan agreement allows for penalty free early loan repayment and if not, what these penalty fees are going to look like.

When it comes to personal loans, typically with loan terms ranging from 12 months to 7 years, lenders allow borrowers to make extra payments but will generally charge loan exit penalty fees to recoup on lost interest.

It is always a good idea to opt for a personal loan that allows for penalty free early repayment and if it’s too late for that, you may want to try to refinance your loan with a lender that allows it. Below we will take a look at a few lenders that allow early repayment and won’t charge you for it!

  • Symple: Offer loans from $5,000 to $50,000 with no early repayment fees.
  • Harmoney: Offer unsecured personal loans between $2,000 and $70,000 and do not charge early repayment fees.
  • The LendingClub: allows customers to repay their loans early with no early repayment penalties and currently offer personal loans from $1,000 to $40,000
  • SoFi: SoFi allows Australians to borrow between $5,000 and $100,000 and have no pre-payment fees or any fees at that! Simply pay the interest on your loan and repay early if you need to!

Repaying your home loan early

Home loans may carry the lowest interest rates among all the loan types discussed to date but will cost you more overall due to the longer loan terms.

Whether or not paying off your home loan early is a good idea depends entirely on the type of home loan that you have as well as your personal financial capabilities and goals.

All variable rate interest home loans allow penalty free early repayments and this is very important to keep in mind if you have yet to apply for a mortgage.

Generally speaking, repaying your home loan early will save you thousands of Dollars and is almost always a good idea. This is because you will reduce your loan balance and therefore be charged less interest, as well as reduce your loan term so you’re being charged interest over a shorter period of time.

How to repay your home loan early

If you’re currently making monthly loan repayments, simply switching to fortnightly payments will increase the number of payments by one each year! This alone has the potential to save you a lot of money!

You should also be careful of using your home equity to borrow money, unless you are struggling with debt and are looking to consolidate your debts.

This is because you may enjoy lower interest and low payments but you’ll be paying these for a long period of time and will end up paying much more than you bargained for.

Finally, if possible, consider refinancing your home loan and switching to a lender that offers a better rate and better terms. This is particularly true if you had a lower credit when you initially took out your home loan but have since improved and kept your finances in check. Be aware of termination fees if you switch home loans.