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3 Ways to Pay Off a Personal Loan Before the End of the Year

The Motley Fool logo The Motley Fool 10/17/2021 Maurie Backman
a group of people standing around a table: 3 Ways to Pay Off a Personal Loan Before the End of the Year © Provided by The Motley Fool 3 Ways to Pay Off a Personal Loan Before the End of the Year

Woman buying items at a yard sale with cash. © Getty Images Woman buying items at a yard sale with cash.

When it comes to borrowing money, there's healthy debt, and then there's debt that's less beneficial for you. Mortgages are considered a healthy kind of debt because they let you borrow money to buy a specific asset -- a home -- that can gain value over time. Credit card balances on the other hand are considered less healthy. That type of debt can cost you a lot of money in interest and it often doesn't lead to the ownership of a valuable asset. Plus, the simple act of carrying a balance on a credit card can harm your credit score.

Personal loans fall somewhere in the middle. Generally, you'll pay less interest on a personal loan than you will on a credit card. And as long as you keep up with your monthly payments, having a personal loan shouldn't negatively impact your credit.

Still, you may not like the idea of being in debt, which means that if you're carrying a personal loan balance, you may be motivated to pay it off by the end of December. That way, you can kick off the new year debt free.

Now, one thing you should know about how personal loans work is that some lenders do charge a penalty for paying off a loan early. But as long as yours doesn't, then knocking out that balance could give you peace of mind going into 2022. Here's how to pull that off.

1. Cut back on leisure spending

You can't necessarily spend less on housing, transportation, utilities, or food. Those are all things you need to function. But the one spending category where you may have some wiggle room is leisure.

Maybe you meet friends for dinner and a movie once a week. Or maybe you get together for a weekly activity like bowling or pottery. As difficult as it might be to give up those plans for a period of time, if they're costing you a lot, that's money that could go toward your personal loan balance. And remember, we're not talking about giving up leisure forever -- just for a few months so you can meet your goal of being debt free by year's end.

2. Get a second job

Maybe you don't want to cut back on leisure spending (or have nowhere left to cut). Or maybe doing so won't make enough of a dent in your personal loan balance to be worthwhile.

If that's the case, look at getting a side hustle on top of your main job. The beauty of a side hustle is that the money you earn won't be earmarked for other expenses. Once you've accounted for the taxes you owe on that income, you can put the rest of it toward your loan balance.

If you're not sure what type of side gig to get, think about the things you enjoy doing. If you like crafting, you may be able to knit scarves or design jewelry on the side and make decent money from it. If you love animals, signing up to walk dogs or pet-sit is a great bet.

Granted, your side hustle may not end up being something you love. You may find that the easiest path to extra money is doing data entry from home, which probably isn't a pastime of yours. But remember, you're trying to meet a goal of being debt free by the end of the year. So, if you really don't like it, your side hustle doesn't have to be something you maintain once your personal loan is paid off.

3. Sell items you don't need

You probably have some items sitting around at home that aren't very useful to you, like the air fryer you bought but have yet to bust out of its box. Now may be a good time to sell those items. You can use the cash you collect to pay down your personal loan balance.

If you have older items that may not fetch a lot of money individually but could be worth something collectively, see about taking them to a consignment store. That way, instead of spinning your wheels to make $5 here and $10 there, a consignment shop may be willing to pay you a lump sum for all of your belongings. Or, that shop might cut you a nice check with a portion of its proceeds once your items sell.

Though having a personal loan isn't necessarily a bad thing, you may be eager to pay off that debt within the next few months. These moves could help you start off 2022 with a clean financial slate -- and a personal loan balance that's fully paid off.

Video: Paying off Parent PLUS Student Loans the Smart and Effective Way! (PennyGem)

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