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Can I make extra repayments to a personal loan?

Can I make extra repayments to a personal loan?

Paying off your personal loan is a good feeling but paying it off early by making extra repayments is an even better one.

If you have a personal loan, you may be wondering whether you can make extra repayments, and what the benefits and disadvantages – if any – may be.

How personal loan extra repayments work

Some personal loan lenders will allow you to make additional repayments on top of your regular loan instalments. This may help you to reduce the loan principal much faster than if you made the minimum-required payments. Plus, by reducing the principal amount you’ll potentially pay less interest over the life of the loan.

For example, if you had a 5-year, $20,000 personal loan at a rate of 6%, if you made only the standard $387 monthly repayments, you’d pay $3,199 in interest. However, if you paid just an additional $50 a month, you’d shave 5 years off the loan and only pay $2,768 in interest.

Personal loanMonthly repaymentsTotal interest chargedTotal cost of loan
No extra repayments$387$3,199$23,199
Extra repayment of $50 a month$437$2,768$22,768

Source: RateCity.com.au. Note: Figures based on hypothetical 5-year, $20,000 personal loan at 6%. Does not factor in fees or rate fluctuations. Assumes making $50 in extra monthly repayments from beginning of loan.

However, what you pay in interest is how the lender makes its money, so not all lenders will allow you to do this. Some may even charge you a fee for making extra repayments. It’s worth reading the product disclosure statement associated with the personal loan to double-check this first.

What other features may a personal loan offer?

If your personal loan lender allows you to make extra repayments, chances are they may offer another potentially competitive feature as well: a redraw facility.

A redraw facility allows personal loan customers to draw down on some, or all, of the extra repayments they’ve made over the years while repaying their loan. This may come in handy in the event of financial stress, such as overdue or unexpected bills, or even if you just want to finance a family holiday.

Keep in mind that once you withdraw any extra funds you’ve paid into your personal loan, you’ll be increasing the principal amount owing. This in turn may increase the amount of interest you’ll be charged and may mean your regular repayments increase.

Some personal loan lenders may require you to pay a certain amount in extra repayments before you can access these funds. Also, personal loan redraw facilities are typically reserved for variable rate loans. If you’re in need of a fixed rate personal loan, this feature may not be available to you.

What are the pros and cons of making extra personal loan repayments?

Making extra repayments on your personal loan can go a long way in chipping down an otherwise intimidating debt. But there are both risks and benefits that are worth weighing up.

Benefits of extra repayments on a personal loan:

  • Pay off your debt quicker – The most significant advantage of making extra repayments is that you may be able to shave months off your loan term.
  • Pay less interest – The lower your principal amount owing, the less interest you’ll be stung with.
  • Access funds – If your lender offers a redraw facility, you may be able to access these funds when you need them.

Disadvantages of extra repayments on a personal loan:

  • Your current lender may not offer it - If you’ve already signed up for a personal loan and want to make extra repayments, you may discover your lender does not permit this. If this I something you really desire for your personal loan, it may be worth considering refinancing.
  • Fees and caps – Some lenders may charge you a fee for making extra repayments. And some may cap the amount you can pay, or even limit the amount you can withdraw if using a redraw facility.
  • Variable rate only – Generally speaking, making extra repayments or having a redraw facility may be reserved for variable-rate loan customers. If you’re set on a fixed rate loan, check if extra repayments are allowed before proceeding.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Learn more about personal loans

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Can you pay off a quick loan early?

Many lenders will allow you to make extra repayments onto a quick personal loan when you can afford them, or even exit the loan early, which can help reduce the total interest you are charged. Be sure to check your quick loan’s terms and conditions, as some lenders charge early exit fees for paying off a loan ahead of schedule.

How can I get a $3000 loan approved?

Responsible lenders don’t have guaranteed approval for personal loans and medium amount loans, as the lender will want to check that you can afford the loan repayments on your current income without ending up in financial hardship.

Having a good credit score can increase the likelihood of your personal loan application being approved. Bad credit borrowers who opt for a medium amount loan with no credit checks may need to prove they can afford the repayments on their current income. Centrelink payments may not count, so you should check with the lender prior to making an application.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Can I get a fast loan with bad credit?

Some lenders offer fast loans to borrowers with bad credit. Providers of small payday loans of up to $2000 or medium amount loans of up to $5000 may have no credit checks, though these lenders will usually want to confirm you can afford its loans on your income.

How long does it take to get a $5000 loan?

Depending on the lender, personal loans and medium-amount loans for $5000 can sometimes be approved in under an hour, and give you access to the money the same day. Other loans may take 24 hours or longer to assess your application, and you may not get the money for a few days.