How Can I Pay Off Loans Sooner?
Loans help consumers achieve home ownership, buy a vehicle, go to college and achieve other financial goals. While useful, you also pay interest on the amount borrowed, adding to its cost. Paying off your loan in a shorter period of time means you pay less interest and eliminate the debt for a lower debt-to-income ratio. Read the fine print in the loan paperwork to ensure you won't have to pay a prepayment penalty.
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Loan Term Considerations
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Your decisions before you sign the loan papers affect how fast you pay it off. For most loans, the length of time you repay the money is negotiable. A longer loan term means your payments are lower each month, but you also make payments for a lot longer. Consider a shorter loan term to get the debt paid off faster. For example, instead of the typical 5-year car loan, choose to pay it off in three years. Go with a 15-year mortgage instead of a 30-year home loan.
Increase Monthly Payments
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An increase in your regular monthly payments helps you whittle away at your loan balance. Add on a certain amount each month to your regular payment. If your car loan payment is $325 a month, pay $400 to pay it off sooner. Pay the same amount extra each month or vary it depending on the amount of extra money you have that month. Specify that you want the extra amount to go to the principal, especially on a mortgage. This lowers the amount you borrowed faster, reducing your interest expenses.
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Apply Extra Funds
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At times, you may receive a large, unexpected amount of money. This might include a bonus, tax refund, inheritance, birthday money or a monetary holiday gift. Instead of spending that money on things you don't need, apply at least a portion of the unexpected money to the loan principal. While this option won't consistently decrease the balance, it will drop your balance faster than just making the minimum regular payment.
Stay Current
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No matter how long your loan term, staying current on your payments is essential to getting it paid off in a timely manner. A late payment causes a late fee, which increases your balance. The money you pay for the late fee could have gone toward the principal to pay off the loan faster. If you continue falling behind, it is difficult to get caught up. You may fall further behind and take even longer to pay of the loan balance. Pay your loan by the due date every month to stay on track.
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