Debt can feel like a mountain looming over us. Especially if it’s out of control. One way to reign it in is to start paying off a loan early.
Why would you do that? Because you’ll save loads of money by paying less interest!
Americans pay a massive amount of interest each year. It’s estimated to be around $104 billion.
Isn’t it time to get some of that money back in your wallet? Here’s how.
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Strategies to Pay Off a Loan Early
There are several strategies that can help you pay off your loans early. This goes for any type of loan, from personal loans, mortgage loans, to even student loans.
The key item you need? A little extra money to pay on your loans.
Take a look at your budget, first. Try to find a few dollars extra each month. Use them in the strategies listed below, and you’ll find yourself closer and closer to a debt free life!
You can use these debt reduction strategies on any type of loan. Mortgages, credit cards, personal loans and lines of credit. But, be sure you don’t have a prepayment penalty, first.
Got a prepayment penalty? You’ll want to see if the cost outweighs the amount of money you’ll save in interest. Do the math and then decide if early payoff makes good financial sense.
Ready to start? Here’s a quick list of ways you can start paying off your loans early!
1. Pay More Than the Minimum Payment
If you want to pay off debt early you have to pay more than the minimum payment. The more you can pay, the faster the debt disappears.
If you only pay the minimum payment, you make almost no progress on your balance. You’ll be paying mainly interest. Even a few dollars can make a significant difference.
Struggling to find the extra cash for it? Round your payment up to the nearest $10. It’ll surprise you how much it will help!
2. Pay Bi-Weekly Instead of Monthly
Break your payment into bi-weekly payments instead of one monthly payment. Wondering how this pays off your loan faster? Here’s how it works.
- You pay half your payment every other week
- There are 52 weeks in a year
- That means you make 26 partial payments
- It equals out to 13 full payments instead of 12 over the year
With this simple change, you’ve made an extra payment without realizing it.
The only problem with this method: some lenders don’t work well with it. Check with yours to be sure before you start!
3. Make an Extra Monthly or Yearly Payment
Got some extra cash in the budget? Pay it towards your loan! One extra payment each month or year can cut a serious chunk out of your loan balance.
The easiest way to do this is to log into your account. Most credit cards have a one-timeÂ online payment option you can use. You can also use a bill pay service through your bank account.
One good source of an annual lump payment is your tax return. Pay it on your loans as soon as you get it!
This tip is very effective in paying off your loans early. You’ll reduce your balance which reduces accumulating interest. You’ll watch your debt disappear faster.
4. Use the Snowball Method
Never heard of the snowball method? It’s time you did! This is a great way to pay off many loans over a period of time.
Here’s how it works:
- Step 1: List all your loans by balance, smallest to largest
- Step 2: Pay extra on the loan with the smallest balance
- Step 3: Pay minimum payments on everything else
- Step 4: After you pay off the smallest loan, move on to the next one on the list
- Step 5: Take the entire payment you were paying on the first loan and add it to what you’re already paying on the next one. Then repeat!
Before you know it, everything gets paid off! The snowball method is very effective when you are feeling overwhelmed by debt.
5. Stop Using the Account
This is important. Don’t continue to use the account while you’re paying it off. If you do, you’ll lose any progress you’ve made.
Now, this is only a problem for credit cards and line of credit accounts. Personal loans are for a specific amount, so you can’t use them again and again.Â
Here are some ways to keep yourself from using credit cards and line of credits.
Put Them Away
Take your credit cards out of your wallet. Store them in a folder with statements and account information. Only take them out for emergencies.
Remove Saved Credit Cards
You know how sites like Amazon and Etsy like to store your credit card information? This makes it easy to hop on and buy what you want. And that is a problem when you’re paying off debt.
Remove any saved cards from shopping apps and accounts. If they remain linked, then it’s too easy to buy things with them.
Know What an Actual Emergency Is
Credit cards are necessary for emergencies. If your car breaks down, you can use your credit card to fix it. That is appropriate because you need to get to work.
If you get sick, you can get the care you need. This is an emergency to use your credit card for.
What’s not an emergency? A sale on your favorite soap, not even if you’re running out.
A vacation? Also not an emergency. You can save up cash and wait for that, or take a local trip that’s more affordable, instead.
It’s easy to say something is an emergency and whip out your credit card. But, is it a true emergency? Ask yourself, first!
- Can I live without it?
- Can I get to work?
- Can I wait a little longer to save up cash?
Don’t sabotage your pay off efforts. Know the difference between a want and a need. Choose well before you use an account you’re trying to pay off early.
The best reminder is to keep your goal front and center. You’re striving to be debt free. You’ll even increase your credit score!
6. Refinance Your Loan
When you first get a new loan a considerable amount of your loan payment goes towards the interest, not the principal balance. Lowering the interest rate on a loan can save you a significant amount of money over the course of a loan.
If you have an interest rate that is higher than the rate you could get on a new loan, consider refinancing. You can contact your current lender to see if you’re a good candidate to refinance, and how much it may save you.
Before doing so, it’s important to note that there are many fees associated with refinancing a loan. If these fees outweigh the savings from a lower interest rate then it’s not in your best interest to refinance.
Refinancing is also helpful if your credit score has increased since closing on the loan. The rate you receive on a loan is directly tied to your credit score, higher the score the lower the rate.
Get a copy of your credit report and take steps to improve your score before applying.
Get Out of Debt Faster!
Paying off a loan early makes good financial sense. Choose one or more of the tips above and watch your debt shrink. You’ll be debt free before you know it.
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