Personal Loans

How Long Does It Take to Pay Off a Personal Loan?

The amount of time it takes to pay off a personal loan depends on how much you're borrowing. Compare loan terms and find one that works for you.
A woman uses a calculator to find out how long it will take her to pay off a personal loan
By Miranda Marquit
Posted on: August 31st, 2022

Getting a personal loan can be one way to bridge the gap and cover important expenses.

However, when you get a personal loan, you need to be able to afford the monthly payments.

Deciding on a personal loan payoff term can impact how much you pay each month and when you retire the loan.

Additionally, you might decide to pay off your personal loan early if you have extra cash. Paying off a personal loan early has its own consequences as well.

Learn how personal loans work and what you need to know about paying down this debt faster than expected.

Personal Loan Payoff: How It Works

Personal loans are designed to allow you to get the funds to use on almost anything that you prefer. They can be used for major purchases and vacations, for financial emergencies or to cover other costs that you might be struggling with.

Most personal loans are unsecured

Most personal loans are unsecured loans, meaning that you don’t need to provide collateral for the loan. There are some lenders that offer secured personal loans.

With a secured loan, you offer something of value (like a car or money in a savings account) that can be taken in the event that you don’t pay your loan.

Set your monthly payment

Once you have the loan, you repay it over a set period of time. Many personal loans have a fixed interest rate and a set monthly payment. With this approach, you can budget for your monthly payment since it will be the same every month until you reach the end of the loan term.

Decide on a term

Depending on the lender, you might be able to get a personal loan for a term of two, three, five, or seven years.

The loan longer the loan term, the smaller the monthly payment. However, you will also likely have a higher loan payoff amount due to interest.

A longer loan term leads to more manageable monthly payments but a higher overall interest cost.

One strategy that some borrowers use is to get the longest term possible so that they know they can handle the monthly payments but then put extra toward paying off the loan early to save money on interest.

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Paying Off a Personal Loan vs. a Credit Card

A personal loan is an installment loan.

  • You make regular payments for a set amount of time.
  • When all installment payments have been made, the loan is paid off.

On the other hand, a credit card is known as revolving credit.

  • You’re given a set credit line, and you can borrow up to that amount.
  • As you pay down your credit card, you “free up” that credit to use again.
  • The loan doesn’t close even if you pay off your credit card balance.
  • Instead, it remains open, a line of credit that you can access in the future.

Each type of debt also has a different impact on your credit score. You can use an installment loan calculator to try out different payoff scenarios.

Which Personal Loan Term Should You Choose?

When choosing a personal loan term, you shouldn’t think only about its impact on your credit score.

Instead, consider your current financial situation and the loan term best fits your needs.

Loan terms vary according to the lender. Some lenders offer loans with terms as short as six months.

Personal loans of 2-3 years

These extremely short-term loans might have weekly payments instead of monthly payments.

For loans with monthly payments, you’re likely to terms no shorter than two years, although there are exceptions.

Personal loans from 3-7 years

Long-term loans are those that have terms of at least two years.

Many personal lenders allow you to choose between three-year terms and five-year terms. Some lenders do offer personal loans with six-year or seven-year terms.

However, you usually have to borrow tens of thousands of dollars in order to get loan terms that long.

Personal loans of 7 years and longer

Finally, there are some personal loan providers that offer high loan amounts, up to $100,000, and terms of up to 12 years. However, you might be required to secure a loan that large with a valuable asset.

Look at how much you can afford each month in payments. Also, consider how long you want to be in debt.

You can do an early loan payoff to save money, so weigh that against a manageable monthly payment.

If you’re not sure you can handle a higher payment with a three-year loan term, consider getting a five-year term so that you don’t miss payments and damage your credit score.

Pros and Cons of Short-Term vs. Long-Term Personal Loans

While short-term loans help you pay off a loan faster, long-term loans can help lower your payment. There are drawbacks and benefits to both types of loans.

Short-Term Personal Loans

Long-Term Personal Loans

Paying Off Your Personal Loan Early: Is It Worth It?

If you have extra money, you might want to get out of debt faster by paying off your personal loan early.

Before deciding on an early personal loan payoff, consider the pros and cons, and how it might impact your personal financial situation.

What is the benefit of paying off a personal loan early?

The main benefit to paying off a personal loan early is the savings in interest. When you pay off your loan early, you end up paying less interest overall. This also gets you out of debt faster and you can put your money toward other financial goals.

For those who don’t want the debt hanging over their heads, paying off a personal loan early can make sense. However, it’s not always the best choice.

When could it make sense not to pay it off early?

Rather than an early personal loan payoff, you might be in a better place financially if you stick with the original payoff schedule.

Before you make your decision, consider the following issues:

Is there a payoff penalty?

Some lenders charge a penalty when you pay off your loan early. This can cost you extra money. Consider whether the penalty is more than the amount of interest you would save.

How does it affect my credit score to pay off my loan early?

Paying off your personal loan early could halt some of your progress on your credit score. With a closed account, your credit history and current payment history will be impacted.

When will a payoff show up on my credit report?

Depending on when the payoff shows up, you could end up with a slightly lower score right when you want a higher score for some other financial reason, such as getting a mortgage.

Would paying off the loan early cause greater financial risk?

If you use your savings to pay off your personal loan, you might end up depleting your account. In that case, you might be less able to handle a money emergency. In that case, you could end up back in debt.

Is it better to pay down credit card debt?

If you have credit card debt, you might be better off maintaining your personal loan and tackling the credit card debt, especially if it has a higher interest rate. You’ll pay down higher-interest debt and improve your credit utilization rate (and credit score).

Dos and Don’ts of Paying Off Your Personal Loan

As you decide whether to pay off your personal loan early, consider paying attention to the dos and dont’s. You want to make sure that you’re taking the right steps for your personal finances.

Do This When Paying Off Your Personal Loan

Don't Do This When Paying Off Your Loan

FAQs

Do you have to pay back personal loans immediately?

Each personal loan has its own terms. However, you usually have to make your first payment 30 days after you take out your personal loan. Short-term loans, like those that are 12 months or less, might require you to begin making payments one to two weeks after getting your funds.

Can you use a personal loan for debt consolidation?

Yes, a personal loan can help you pay off other debts with higher interest rates. Using a personal loan for debt consolidation can potentially save money in interest and help you get out of debt faster if you have a plan.

What fees come with personal loans?

Depending on the lender, you might have to pay an administration or origination fee when you get a personal loan. This can reduce how much money you get, or it can add to the cost of the loan. Additionally, some lenders charge prepayment penalties with an early personal loan payoff.