Loans are commonplace in our society, and most people will carry a variety of debts during their lifetime. Whether an auto loan or a credit card, debt has the same weight – a monthly bill you must pay back. While it's not always the easiest thing to do, your goal should be to repay your balance as quickly as possible. Doing so can positively affect both your financial and mental well-being.
While some loans are long-term, such as a mortgage, and may seem like a lifetime away, there are easy tricks you can do to help accelerate the process. Here are six tactics to help you pay off debt quicker.
1. Switch to Bi-Weekly Payments
Most installment loans, whether mortgages, car loans, or personal loans, have a set monthly payment. You can choose to pay these monthly or set up bi-weekly payments instead.
With bi-weekly payments, you make half your monthly payment every other week. This strategy helps you pay off debt quicker because you end up making an extra full payment each year. With this additional payment, you'll pay your debt off faster and pay less interest overall.
2. Consolidate Debt
Consolidating debt may sound tedious and time-consuming, but it can be quite easy.
When you consolidate your debt, you transfer your outstanding balances (loans and credit cards) to a new credit card or personal loan. By doing so, you're able to save significantly on interest – allowing you to put more money toward repaying the outstanding loan balance.
For example, imagine you have three credit cards, each with different rates and balances.
Credit Card #1 $2,500 18% APR
Credit Card #2 $1,750 14% APR
Credit Card #3 $3,000 21% APR
New Personal Loan $7,250 9% APR
Debt consolidation allows you to transfer all these high-interest rate balances to a lower-rate loan, such as a personal loan. So instead of three credit cards, you'd now have one personal loan at a much lower interest rate. Plus, managing a single loan is much easier than making several monthly credit card payments.
3. Refinance Your Loans
Similar to debt consolidation, loan refinancing sounds complicated. But most of the time, the process can be completed with relative ease. With a loan refinance, you are simply opening a new loan to replace your existing loan – typically to create more favorable loan terms for yourself.
Common reasons people choose to refinance loans are:
Interest Rates Drop: Refinancing your loan at lower interest rates will help you to lower your monthly payments and pay less interest over the life of your loan.
Credit Score Increase: If your credit score has improved significantly since you opened your loan, you may qualify for lower interest rates.
Adjust Loan Terms: Depending on your financial situation, you may choose to adjust your loan term. Shortening your loan will increase your monthly payments, but you’ll pay less interest overall. Extending your term will reduce your monthly payments but increase how much you pay in interest. (This strategy is helpful if you’re facing financial difficulties.)
It's important to note that some lenders place restrictions on refinancing existing loans. This is mainly because refinances tend to be in your favor, not the lender's.
More commonly, refinances involve switching your loan from your current lender to a new one for better rates or terms. For example, if you initially financed your car loan with the dealership, you could switch your loan to the credit union.
4. Make Smaller, More Frequent Payments
When it comes to eliminating credit card debt, the best methods are more psychological. Making one large monthly payment can be challenging and cause you to feel defeated as your checking account takes a hit.
Instead, try to make smaller, more frequent payments throughout the month. That way, your checking account balance isn't affected all at once, and the impact doesn’t seem as significant. Plus, you may find that this strategy will help you become more conscious of your spending habits and lessen the amount you put on your credit cards.
5. Pay Extra Toward the Loan's Principal Balance
When you borrow money, your loan payment is broken down into two parts: 1) principal balance and 2) interest. The principal balance is the actual amount you owe, and the interest is the cost you pay to borrow the money.
With this strategy, you pay extra each month toward your loan's principal balance. For example, if your monthly car payment is $450, you could round it up to $500 each month instead - with the extra $50 going to the loan's principal.
Every time you pay extra toward the principal balance, you’re decreasing your outstanding loan balance – helping you eliminate the debt sooner and pay less interest over the life of the loan.
Before making extra principal payments, ensure your loan does not have prepayment penalties or restrictions.
6. Use Financial Windfalls
Most people's first inclination when receiving an unexpected amount of money is to treat themselves or their families to something they’ve been wanting or a fun trip. However, any time you receive extra money from a raise, bonus, or tax return, you should compromise and try to put a portion of that toward eliminating your debt.
Since windfalls are often unexpected, they are an excellent way to really put a dent in your outstanding debt without affecting your monthly budget.
Anytime you eliminate debt early, you’ll be in a better financial position. While loans are often necessary, for example, buying a house or car, finding ways to pay less interest is always wise.
If you’re interested in refinancing loans or consolidating debt, we’re here to help. And our lending team is always available to answer questions and help you discover ways to lower your outstanding debt.
To get started, please stop by any of our convenient branch locations or call 248-322-9800 extension 5.
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