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Paying Off Thrift Saving Plan (TSP) Loans Early

Paying Off Thrift Saving Plan (TSP) Loans Early
Lauren Ward
Lauren WardUpdated December 21, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Are you wondering, should I pay off my TSP loan early? For many borrowers, the answer to that question is yes. That’s because the purpose of a TSP is to help government and military service members afford retirement. By taking money out of the plan with a loan, you may be borrowing against your future. All money contributed to a TSP grows through compounded interest. The longer you leave money in your account, the longer it has to grow. If you take out a TSP loan, the money you borrowed is no longer earning that interest. However, repaying the loan quickly means those funds will start earning compounded interest again. Read on to find out how to pay off a TSP loan early, the pros and cons of doing so, and alternative payment methods you may want to consider. 

What Are TSP Loans? 

TSP stands for Thrift Savings Plan and is a type of retirement plan created by the US government for federal employees and uniformed service members. It can replace about one-third of an employee’s paycheck if they contribute 10% of their monthly pay over the course of 30 years. When you have a TSP account, you can borrow against it. This is known as a TSP loan.  The minimum TSP loan amount is $1,000. The maximum amount you can take out with a TSP loan is the smallest of these three conditions: 
  • What you have contributed (plus interest received)
  • 50% of your total account balance or $10,000 (whichever is more) 
  • $50,000 (minus any additional TSP loans you may have taken out)
Generally, you must repay a TSP loan within five years—unless the loan is being used to purchase your primary home. In that case, you have 15 years to pay it back.

Types of TSP Loans

There are two different types of TSP loans:
  • General Purpose TSP loan
  • Primary Residence TSP loan
A general purpose TSP loan is essentially a personal loan, and can be used for anything. Borrowers can choose between a loan term of one to five years, and they do not need to provide documentation to take out the loan. There is a $50 application fee.A primary residence TSP loan can be used for the purchase or construction of a primary residence. It cannot be used to renovate your home or to buy a second home or an investment property. Borrowers must provide supporting documentation that shows the costs of construction or purchase of the property. A primary residence TSP loan needs to be repaid within 61 to 180 months. The application fee is $100. TSP borrowers can only take out one primary residence loan at a single time, but they are permitted to have two general purpose loans.

Advantages of Paying Off a TSP Loan Early 

A TSP is meant to provide account holders with a source of income during retirement. When you take out a loan against your TSP savings, you miss out on compounded earnings. The sooner you can pay back the amount you borrowed, the better, because your account will have more time to grow. Another benefit from paying off a TSP loan early is that there is no prepayment penalty for doing so. Some loans and lenders do charge fees when borrowers pay off their loans early, but TSP loans do not. In fact, you can easily schedule an extra payment to automatically come out of your paycheck. In addition, it can be difficult to make monthly TSP loan payments and contribute to your TSP account at the same time. If you pay off your loan early, contributing to your TSP account may be easier. 

Disadvantages of Paying Off a TSP Loan Early 

A TSP loan also has a low interest rate. As of November 2022, the interest rate on a TSP loan was just 4%. And because it’s your money, the interest you pay on a TSP loan goes back to your account. If you pay off your loan early you won’t have access to that kind of low-interest loan.However, even though you are essentially paying yourself with interest, the rate you pay is less than you would have earned from compounded interest if you hadn’t taken out the loan. Paying the loan off early means your money can grow again. 

TSP Loan Early Payoff Penalties 

Payments 

There are no prepayment penalties for paying off a TSP loan early. To make an extra payment, you can send a cashier’s check, money order, personal check, or schedule payment directly through the online portal. 

Interest Rates 

The interest rate on your TSP loan will not change if you make an early payment or extra payments.  

Deductions 

Borrowers can arrange to have TSP loan payments automatically deducted from their salary. Once again, there are no prepayment penalties for paying it off the loan early.  

Is Your Credit Score Impacted by Paying Off a TSP Loan Early? 

There is no impact to your credit score if you pay off a TSP loan early. Since you are borrowing your own money, a TSP loan doesn’t require a credit check, and it doesn’t affect your credit score in any way—even if you pay off the loan early.

How Long Do You Have to Pay Off a TSP Loan? 

For a general purpose TSP loan, you have one to five years to repay it. With a primary residence loan, you need to pay it back within 61 to 180 months. 

Ways to Consolidate Debt When Paying Off TSP Loans  

Wondering how to pay off a TSP loan? Here are some options for consolidating debt:

Personal Loans  

A personal loan could make sense for consolidating debt because they have lower interest rates than credit cards. You can compare interest rates for personal loans to see which one might make the most sense for you.With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in monthly installments, typically over one to five years. The higher your credit score, the lower the interest rate you may get. Once you’re approved for a personal loan, you can typically receive the funds within one to five days. There are many types of personal loans you can choose from. An advantage of personal loans is that they are flexible and can be used for just about any purpose. One type of personal loan is debt consolidation loans. This loan is designed to help borrowers pay off their debts.The difference between debt consolidation vs personal loans is that debt consolidation loans are meant specifically to help you pay off debt, and personal loans can be used for a wide variety of purposes.  Both loans typically have lower interest rates than credit cards. Recommended: Personal Loan Debt-to-Income Ratio

Credit Cards 

A credit card with 0% introductory rate could be a way to consolidate and pay off your debt. The length of the 0% intro APR period varies depending on the credit card, but in some cases, it lasts for more than a year. However, credit cards have high interest rates. So if you’re considering this option for debt consolidation, you’ll want to be confident that you can fully pay off what you owe before the introductory period ends. If you can’t, you may end up paying a high interest rate. 

The Takeaway 

A TSP loan allows account holders to borrow against the money in their TSP retirement account. However, it’s generally a wise idea to pay off a TSP loan early so that the money goes back into your account where it will earn compounded interest. The longer the money is in there, typically, the more it will grow. There is no prepayment penalty for paying off a TSP loan early.If you’re looking to pay off your TSP loan and consolidate debt with a personal loan, Lantern by SoFi can make the process faster and easier. In our online marketplace, you can compare offers from multiple lenders all in one place. This makes it convenient to find a loan option that suits your needs and situation.Find and compare personal loan options with Lantern.

Frequently Asked Questions

Can you pay off a TSP loan early?
Can you use a personal loan to consolidate TSP loan debt?
Are there any penalties for paying off a TSP loan early?
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About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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