5 tips to pay off your loans faster
- Refinancing your loans could give you a better interest rate and a shorter repayment period.
- Two common repayment strategies are the debt avalanche and the debt snowball.
- If you can pay off your debts more often, you save on interest costs.
With credit available for everything from financing college to buying a new car to renovating your home, you could be facing a mounting mountain of debt before you know it. Paying off these loans as soon as possible will save you money in the long run and free up your money for other financial goals.
Most loans come with interest, the additional fee a borrower pays to use the lender’s money. The faster you pay off a loan, the less interest you have to pay.
5 expert tips to pay off your loans quickly
Reducing your loan balances faster than planned is possible and doesn’t have to be that complicated. These five tips can help, says Gabe Krajicek, CEO of kasasaa fintech company providing financial products and marketing services to community banks and credit unions:
1. Unlock equity
Using assets you already need to pay off your loan can help you pay off your loan faster and eliminate the need to do things like get another job or cut your budget. “You can use your existing equity to pay off loans,” says Krajicek. “This includes all illiquid assets like real estate and stocks.”
2. Refinance your loans
Refinancing your loans allows you to get a lower interest rate, saving you interest on your loan. You may also be able to shorten your repayment period, which will increase your monthly payments but pay less interest overall.
3. Consolidate your credit debt
You may be able to consolidate multiple loans into one with a single monthly payment, making it easier to keep track of your loan balance. You may even be able to get a lower interest rate, although this is more common when refinancing loans.
Krajicek recommends contacting a local community bank or credit union. Depending on the type of loan, you can also refinance with an online lender or a major bank.
4. Pay more money more often
If you’re financially able, you can quickly lower the cost of your loan by making more payments than planned. Or you can make larger payments at the same rhythm as you have already paid.
“The faster you pay off your loans, the more money you’ll save in interest, but be careful not to sacrifice your safety net,” says Krajicek. “Life’s surprise expenses don’t stop just because you’re on a mission to pay off your debts.”
5. Seek help
There are several ways to lower your payments, get help paying off your loans, or even waive loans altogether. This can be done through government programs or local organizations. You can also ask family and friends for money to pay off your debt and then pay it back at a lower interest rate or with no interest.
Here’s how to start reducing your loan balances
Additional payments allow you to lower your balance faster. If you’re able, side jobs could help you plunk down extra money on your loan debt. If your overall loan balance goes down, your interest payments will go down as well. Set up automatic payment to make sure you don’t miss any payments.
The two most popular strategies for paying off credit debt include the debt avalanche and the debt snowball.
In the event of a debt avalanche, pay off your loan with the highest interest rate first. Once your debt with the highest interest rate is paid off, move to the next higher interest rate, and so on. That way, you’ll save more money over the course of the loan, says Forrest McCall, personal finance expert and owner of the finance blog: “Don’t work another day.”
With the debt snowball method, you start by paying off your smallest debts first. They pay the most for the smallest debt and the least for the rest.
“After that initial debt is paid off, you put the full amount of your repayment down to the next lowest amount,” says Krajicek. “And of course, limit accumulating more debt while you work to pay down current debt.
What happens if I skip loan payments when allowed?
Unpaid interest during forbearance periods can increase your overall loan balance because you continue to accrue interest on increasing amounts of money if you don’t actively pay back the total amount owed.
Capitalized interest is unpaid interest that is added to your total loan amount after periods of non-payment, including forbearance, deferral, and after any grace period (grace periods typically apply to student loans). This increases your total loan balance, and you later pay interest on that higher amount, increasing the overall cost of your loan.
Interest can be capitalized for any type of loan.
What happens if I only make the minimum loan payment?
Paying less than the recommended monthly amount can increase your overall loan balance. That’s because when you pay the minimum amount, most of your money goes toward interest and fees, not your entire loan amount.
It might seem tempting to make the required minimum payments since you’ll have more cash in your pocket. But the interest can add up if you only pay the amount you’re asked to pay, McCall says.
“To avoid increasing your loan balances, be careful about making payments that exceed minimum payments,” says McCall. “Because minimum payments are primarily interest-driven — you need to make sure you make larger payments or interest can keep piling up.”