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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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