Can I make additional repayments on a personal loan?

Paying off your personal loan feels great, but paying it off sooner with additional payments is even better.

If you have a personal loan, you might be wondering if you can make additional repayments and what the pros and cons, if any, might be.

How the additional repayments of a personal loan work

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

For example, if you had a personal loan of $ 20,000 over 5 years at a 6% rate, if you only made the standard monthly repayments of $ 387, you would pay $ 3,199 in interest. However, if you only paid $ 50 more per month, you would gain 5 years on the loan and pay only $ 2,768 in interest.

Personal loan Monthly repayments Total interest charged Total cost of the loan
No additional reimbursement $ 387 $ 3,199 $ 23,199
Additional repayment of $ 50 per month $ 437 $ 2,768 $ 22,768

Source: RateCity.com.au. Note: Figures based on a hypothetical $ 20,000, 5 year 6% personal loan. Does not take into account fees or rate fluctuations. Assumes $ 50 in additional monthly repayments made from the inception of the loan.

However, what you pay in interest is how the lender makes their money, so not all lenders will allow you to do this. Some may even charge you a fee for making additional refunds. It is worth reading the product disclosure statement associated with the personal loan to verify this first.

What other features can a personal loan offer?

If your personal loan lender allows you to make additional repayments, chances are they also offer another potentially competitive feature: a withdrawal facility.

A withdrawal facility allows personal loan customers to withdraw some or all of the additional repayments they have made over the years while paying off their loan. This can come in handy when you’re under financial stress, like overdue or unexpected bills, or even if you just want to fund a family vacation.

Keep in mind that once you withdraw the additional funds that you put on your personal loan, you will increase the amount of principal owed. This in turn can increase the amount of interest you will be charged and may mean an increase in your regular repayments.

Some personal lenders may require you to pay a certain amount in additional repayments before you can access these funds. In addition, personal loan renewal facilities are generally reserved for variable rate loans. If you need a fixed rate personal loan, this feature may not be available to you.

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

Making additional payments on your personal loan can go a long way in reducing otherwise daunting debt. But there are both risks and benefits that are worth weighing up.

Benefits of additional repayments on a personal loan:

  • Pay off your debt faster – The most important benefit of making additional repayments is that you may be able to save months over the life of your loan.
  • Pay less interest – The lower the amount of your principal owed, the less interest you will incur.
  • Access funds – If your lender offers a redemption facility, you may be able to access these funds when you need them.

Cons of additional repayments on a personal loan:

  • Your current lender may not offer it – If you’ve already taken out a personal loan and want to make additional payments, you may find that your lender doesn’t allow it. If this is something you really want for your personal loan, it might be worth considering refinancing.
  • Fees and limits – Some lenders may charge you a fee for making additional repayments. And some may cap how much you can pay, or even limit how much you can withdraw if you use a withdrawal feature.
  • Variable rate only – Generally speaking, additional repayments or the possibility of refinancing can be reserved for customers of variable rate loans. If you opt for a fixed rate loan, check to see if additional repayments are allowed before proceeding.

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