Paying off your loans doesn't always have to be an overwhelming, stretched-out process. Here are 5 tips to paying off loans early.
Are you thinking of paying off loans early?
Consumer debt in the U.S. reached $14.15 trillion in 2019 with loans accounting for a large portion of the debt.
If you have lots of debt, it can feel overwhelming to afford it all.
No matter how much you owe, paying off the debt faster can give you a sense of relief. It can also give you more wiggle room in your budget to cover other bills and prepare for unexpected expenses.
Check out these tips to paying off loans early.
- Read the Terms of Your Loan
Before you put extra money toward your loan, read the fine print to make sure you can do so without paying a penalty.
Some loans include prepayment penalties if you pay the balance off early. When you pay the loan off early, the lender misses out on interest that would have accrued over the full length of the loan.
The penalty is a way to discourage borrowers from paying the debt off early to maximize the interest the lender gets. If you decide to pay the loan off early, the penalty amount compensates the lender for some of the interest they'll lose.
Find out if your loan has a penalty for paying early before you make plans for an early payoff. If it does, find out how much the penalty is.
Compare that to how much money you'll save by paying off the loan early and avoiding some of the interest. If you'll only save $200 and the penalty costs you more, paying the loan off early doesn't save you any money.
- Increase Your Regular Payments
One simple way to cut your loan length quickly is by sending more money than you have to with each payment.
Say your normal payment is $335. Simply rounding it up to $350 or $400 can shorten your loan length. The extra money doesn't eat into your monthly budget too much, but it can save you a lot of money by paying off the loan sooner.
When you make a larger payment, make sure the excess goes toward paying the principal of the loan. This is the actual amount you borrow and not the interest. Your lender might not automatically apply it to the principal.
Paying more of the principal early cuts down on how much interest you pay. You'll end up paying less in interest. You can also shorten the length of the loan.
- Put Extra Money Toward Loans
Making an extra payment on your loan when you have extra money can help you pay it off faster.
You might not have much extra money to pay on your loan consistently each month. But many people get extra money occasionally, and that money can help reduce your loan balance faster.
Maybe you get a bonus at work that you don't figure into your normal budget. If you're paid hourly and work overtime, the extra money you get for those extra hours can go toward your loan.
You might get a tax refund, birthday money, or other unexpected cash that isn't already allocated for regular bills and expenses.
Some months you might simply have a surplus in the budget. If you cut back on eating out or spend less on groceries, you can apply the money you allocated to those things toward your loan instead.
Instead of buying things you don't really need with those extra cash amounts, submit an extra payment toward your loan. Since that money was unexpected, it doesn't take away from your normal budget.
If you don't usually have extra money in the budget, consider pursuing additional income options.
A part-time job is one option. Put every paycheck from the part-time job toward the loan since it's new income and beyond your normal budgeted amounts.
You don't have to work the part-time job forever. It can be a short-term solution to paying off your loan faster.
If you don't want to commit to a regular job, consider the skills you have that could turn into a side gig. If you're an accountant, you might do freelance bookkeeping. If you're good at writing, you can offer freelance writing services.
You can also generate money by selling extra things from around your house. Any money you make by selling those items can go right to your loan to decrease the principal.
- Make Payments More Frequently
Typical loans require one payment monthly. The payment is typically due on the same date each month.
Instead of just paying one time, pay half of the monthly loan amount every two weeks. You'll end up making a few extra payments if you pay every two weeks instead of once per month.
Say your monthly payment is normally $200. You would pay $2,400 toward the loan for the year.
If you pay $100, or half of the monthly payment, every two weeks, you'll pay $2,600 over the year. Instead of making 12 payments of $200 each, you would make 26 payments of $100 each by making a payment every two weeks.
- Refinance Your Loan
In some cases, refinancing your loan through another lender can help you pay off the amount faster. Your new loan might have a lower interest rate, lower fees, or other benefits that help you pay less and pay off the amount faster.
You might refinance to a loan with a shorter term than your current loan. This ensures you'll pay it off faster.
You might have refinancing options even if you have bad credit. Some lenders offer bad credit loans instant approval options that can help you pay off your current debt amount. These loans often have a fast turnaround time to complete the transaction quickly.
When refinancing, consider the costs of getting a new loan. Shorting the loan length doesn't always mean you'll pay less overall. The fees and costs could add up to more than you'll save by paying off the loan early.
Start Paying Off Loans Early
When it comes to improving your finances, paying off loans early can cut the interest you pay and free up more money in your budget. Finding ways to put more money toward your loans can help you become debt-free faster.
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