Should You Prepay a Credit Card Debt Consolidation Loan?

If you have a credit card debt consolidation loan, and you get a sudden windfall, you may consider prepaying your loan. However, you will need to check the terms of your loan first - it may not pay to prepay your loan after all.

What Does It Mean To Prepay My Loan?

Prepaying a loan simply means making extra payments, or paying a higher amount than the monthly payment calls for. It can also mean paying off the entire balance early in one lump sum.

Why Prepay My Loan?

Making extra payments reduces the interest in your loan. When you applied for your loan, your lender calculated your monthly payments by assuming you would make the minimum regular payments towards your loan, and figured out your interest based on this schedule. Every monthly payment you make towards that loan first pays your monthly interest on that loan, and what is left over then goes towards the balance of the loan itself. If you pay more than the required monthly payment, therefore, that means extra money is going toward paying off the balance of your loan, which in the long run could shorten the life of your loan overall.  

Even if you only prepay a few times, it could save you money on interest overall, and even shorten the terms of your loan. When you make that one pre-payment, that lowers how much interest is necessary on each month's payment after that. So all future payments take out less money to pay down the interest, which means more money goes towards paying down the balance. The faster your balance is paid down, the shorter the terms of your loan. Making even just one prepayment each year could lower your interest payments by 13%, and could shorten the life of your loan by a full year.

Are There Times I Would Not Want To Prepay My Loan?

Your lender keeps the interest on your loan, so some lenders charge a fee if you prepay your loan to offset their loss. Your lender must tell you in your loan agreement whether they charge a prepayment fee, and they must also mention the amount of the fee.  

Even if your lender charges a fee, it may be worth prepaying your loan after all. If your lender charges a fee, this fee is usually a fixed amount, and you will only be charged once. So if you make enough prepayments, or make a high enough single prepayment, the total amount of interest you save would be greater than the amount of the penalty anyway, so you would still save money in the long run. On the other hand, if you can only afford smaller or infrequent prepayments, then the total amount of interest you would save may be lower than the prepayment fee, and you would be better off sticking to your original payment schedule.  

Before you consider making a prepayment to your debt consolidation loan, check your lenders agreement carefully to discover whether there are any prepayment penalties. If there are, you will need to estimate your savings in interest on your loan to decide whether prepaying your loan is worth it.

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