What happens if you pay off a personal loan early?

When it comes to paying down debt, you might have heard that paying off your balance as quickly as possible can help you save money in the long run. And this is often the case. If you pay off your credit card balance in full, for example, you'll save on interest charges.

Generally, the longer you're stuck paying back a loan or other debt, the more you'll pay in interest over the lifetime of the loan. So it seems obvious that paying off your personal loan early would be a good idea — but not so fast.

Below, CNBC Select breaks down why personal loans are different from other types of debt and how paying one off early can impact your credit score and your finances.

Personal loans can be used for pretty much any expense — a wedding, a home renovation, a vacation and even debt consolidation. While you may need to explain how you plan to use the money on your application, there generally isn't a hard and fast rule about how you use your personal loan. Student loans are used for paying tuition and other costs associated with an education. Car loans are meant for helping you purchase a vehicle.

Personal loans are different from credit cards because there is no set timeframe for paying back your credit card debt, though, the quicker you pay off the balance the less you'll accrue in interest charges. (Ideally, you pay off your balance on time each month and never pay interest.) Credit cards also have a credit limit, which is usually much smaller compared to the average personal loan amount that borrowers request.

While the interest rate on personal loans is generally much lower than that of credit cards, it really depends on how much money you request and your credit score. Keep in mind that the higher your credit score, the more favorable your terms can be; a good credit score will help you get approved for a lower interest rate or a longer loan term or both.

Sometimes, personal loans come with a few additional fees, including an origination fee and a prepayment penalty. It's the early pay-off fee you need to be wary of.

It is possible to pay off your personal loan early, but you may not want to. Making an extra payment each month or putting some, or all, of a cash windfall, toward your loans, could help you shave a few months off your repayment period. However, some lenders may charge a prepayment penalty fee for paying the loan off early.

The prepayment penalty might be calculated as a percentage of your loan balance, or as an amount that reflects how much the lender would lose in interest if you repay the balance before the end of the loan term. The calculation method will vary from lender to lender, but any prepayment penalties would be outlined in your loan agreement. However, if your lender doesn't charge a prepayment penalty, then paying off your loan early can be a good idea.

There are a number of lenders that don't charge a prepayment penalty. SoFi, for example, won't charge you a prepayment fee for paying off the loan early and there's also no late payment fees. If you'd prefer looking into a peer-to-peer lender, LendingClub is another option for loans with no prepayment fee. Typically, you'll need good to excellent credit to qualify for the best personal loans with the best terms.

According to Experian, personal loans are a form of installment debt. Installment debt is a form of credit that requires you to repay the amount in regular, equal amounts within a fixed period of time. As with any form of debt, making on-time monthly payments on your personal loan can help increase your credit score because payment history accounts for 35% of your credit score.

Also, when you take on a personal loan, you may improve your credit mix, which makes up 10% of your FICO score.

If you pay off the personal loan earlier than your loan term, your credit report will reflect a shorter account lifetime. Your credit history length accounts for 15% of your FICO score and is calculated as the average age of all of your accounts. Generally, the longer your credit history, the better your credit score will be. Therefore, if you pay off a personal loan early, you could bring down your average credit history length and your credit score. How much of a change in your credit score will depend on your overall credit profile.

Having a low credit score can put you at a disadvantage making it difficult to get an apartment, good financial products, even a job. However, practicing good financial habits, like making consistent, on-time payments and avoiding applying for too many new lines of credit at the same time, can help boost your score.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal loan review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.