When closing the account costs less than the remaining scheduled payments, an early payoff can save money. To determine this amount, you’ll need to obtain a dated payoff quote. The amount you originally borrowed will not tell you the savings. Compare the payoff quote with the remaining payments on your schedule to see how much you’d save, then check how much cash you would have left.<\/p>\n\n\n\n
You can make an additional payment and still leave money in your account. If the loan charges interest on the unpaid balance, this can reduce the interest being charged, but it won’t necessarily reduce your monthly payment as paying off the loan in full would.<\/p>\n\n\n\n
Begin with the loan as it stands today. Figure out how much you would still have to pay if you made all of your payments on schedule. You should use the actual amount of each payment due (some payment schedules have a different final payment). Do not count any payments that you have already made.<\/p>\n\n\n\n
Request a payoff quote from the company that handles your payments. Your balance as shown in a payment app or on your statement may not be completely up-to-date. Your payoff quote will include any interest that has accrued since you made your most recent payment. The company should also be able to let you know the date by which that payoff amount will be good.<\/p>\n\n\n\n
Estimated dollar savings = remaining scheduled payments \u2212 total cost to pay off the loan now.<\/strong><\/p>\n\n\n\n Payoff cost is the quote + any applicable separate charge. Make sure you do not count a fee\/refund that is already reflected in the payoff quote. You can subtract a refund if you are certain it will be issued and it’s not already been reflected in the payoff quote. It’s important not to double-count anything, as this will skew your payoff number.<\/p>\n\n\n\n This hypothetical example below is for illustrative purposes only. It is not an offer of credit nor an estimate of your account.<\/p>\n\n\n\n Paying $3,360 now in order to avoid paying $3,600 over the next 12 payments is a $240 saving, not an annual rate of return. It does not take into account interest you may make by keeping your money in a savings account, nor the costs you may incur by needing to borrow money.<\/p>\n\n\n\n If the number is negative, then paying off early costs you more than just making your payments (with these numbers). If it’s a positive number, then paying off early costs less under this comparison. A slightly positive number may still have value if you hate having the monthly payment. This won’t tell you if you have enough money to pay it off early, though.<\/p>\n\n\n\n Remember that interest can continue to accrue from the time you check your account until your account is paid off. Your payoff quote may be based on a payment you have already made clearing. Find out which payments are considered to have already been received in determining your payoff quote and what happens if your payment is received after the payoff quote has expired.<\/p>\n\n\n\n In the case of a simple daily interest loan, a rough daily interest amount can be determined by multiplying the unpaid principal by the annual interest rate and dividing that by the contract’s day-count basis. For example, on $3,000 of unpaid principal at a 12% annual interest rate, using 365 days, the interest would be approximately $6.90 for seven days, assuming the principal stays unchanged. Use the interest rate for this estimate, not the APR (which can include other charges). The interest amount the lender quotes you will depend on its particular way of calculating it.<\/p>\n\n\n\n A prepayment penalty<\/strong> is a charge for repaying before the agreed date. Ask whether paying off your loan in full or in part will incur this charge. If so, ask how long the penalty clause will last and whether its amount changes over time. A fee that makes payoff unattractive today might end later. Keep in mind that interest can continue to accrue on your loan even as you wait.<\/p>\n\n\n\n Writing<\/p>\n\n\n\n Review the prepayment clause and related disclosures for the rules that apply to your loan. Federal disclosure rules<\/a> require that early-payment charges or rebates be disclosed for covered closed-end consumer loans depending on the method used to compute the finance charge. But this doesn’t mean that you can always pay off personal loans early without penalties. Your rights and responsibilities also depend on applicable law and your loan agreement<\/a>.<\/p>\n\n\n\n Precomputed Interest<\/strong>: In some loans, interest is computed up front. In some cases, you can receive a rebate (or refund) on unearned interest if you pay the loan off early. Ask your lender how the rebate is computed and where it will show up in your quote. (Your results may not be the same as you would get using a typical amortization calculator.)<\/p>\n\n\n\n Include any confirmed refunds in a new comparison because these will affect your payoff cost today. Do not include an origination fee that has already been paid and will not be refunded. If you pay off the loan now, you will not get this money back. If the origination fee was added to the loan, however, any amount of that fee still on the loan should be included in your payoff amount.<\/p>\n\n\n\n The balance in your account is making this payoff option look good, but let’s look closer. Let’s say that you have $6,000 in liquid savings and use $3,360 to pay off the balance in full. That leaves you with $2,640 in savings. But if you have $2,000 in bills to pay before your next income arrives, that means you’ll only have $640 to cover everything else.<\/p>\n\n\n\n The size of the cash cushion you keep also depends on how steady your income is and what bills would be most difficult for you to pay. Think about upcoming bills you know are coming. If you know that, for instance, you’re likely going to need to make some car repairs next month, that’s money you anticipate spending, so you should account for it when judging the cash left after payoff, even if you haven’t received the bill for those repairs yet.<\/p>\n\n\n\n\n
\n \nItem<\/th>\n Amount<\/th>\n<\/tr>\n<\/thead>\n 12 remaining payments of $300<\/th> $3,600<\/td><\/tr>\n Payoff quote for the chosen payment date<\/th> $3,320<\/td><\/tr>\n Assumed permitted payoff fee, not included in quote<\/th> $40<\/td><\/tr>\n Total account closure cost<\/th> $3,360<\/td><\/tr>\n Net savings from early payoff<\/th> $240<\/td><\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n\n\n\n Why the quote may differ from your balance<\/h3>\n\n\n\n
Separate future charges from costs you have already paid<\/h2>\n\n\n\n
Look at the cash left after payoff<\/h2>\n\n\n\n