Loan repayment is the process of paying back a borrowed amount, plus interest. It is a common financial obligation that affects most individuals. From student loans and car payments to mortgages and credit card charges, most people have debts they are responsible for 후순위아파트담보대출 repaying.
Use a loan calculator to enter your data and calculate the monthly payment required. You can make extra payments to pay off your loan sooner.
Pay More Than Once a Month
In theory, paying your loan more than once a month could help you reduce the amount of interest you’ll pay day to day and over time. In practice, however, doing so may actually prolong how long you have the loan and increase the total amount of money you’ll owe by the time it’s paid off.
Instead, consider dividing your monthly loan payment into two smaller biweekly payments. This method can be effective as long as your lender doesn’t charge a prepayment penalty and you can budget for the additional expenses.
You can also make a single extra payment each year to accelerate the loan’s payoff. It might involve putting aside a lump sum from your annual holiday bonus or extra savings, selling items, picking up a side hustle, or simply cutting back on impulse purchases to free up cash. When you apply these one-time extra payments toward your loan, you’ll slash the overall life of your debt and save thousands of dollars in interest charges.
Pay Off Your Most Expensive Loan First
As borrowers make loan payments, a portion of the payment goes toward the accrued interest and a portion is applied to the principal. The lender typically sets a minimum monthly payment that borrowers must pay to pay off the debt within the term of their loan. Borrowers who pay more than the minimum amount will see their loan balance decrease more quickly and save money in interest payments.
Choosing the best method of paying off debt depends on the borrower’s balances, interest rates and financial goals. Prioritizing high-interest debt may save the most money, but other strategies may make more sense for some borrowers. This is particularly true for borrowers who have multiple debts with different interest rates. Some lenders charge a fee — known as a prepayment penalty — to borrowers who pay off their loans early. This penalty is often a percentage of the outstanding balance. Avoid prepayment penalties by only taking out a loan that has flexible terms and low initial interest rates.
Focus on the Loan with the Highest Interest Rate
The “avalanche method” of debt repayment prioritizes paying off the loan with the highest interest rate first. When the balance on this loan is paid off, the money can then be used to pay down the balance on credit cards with the next highest interest rates, and so on. This approach reduces your overall credit utilization, which can help improve your credit score and make you a more attractive borrower when it comes time to apply for mortgages or personal loans. However, be aware that some lenders may charge borrowers prepayment penalties for repaying their loans early. These fees are typically a percentage of the remaining loan balance and start at around 2%.
Make One Extra Payment a Year
When you make extra loan payments, you pay less interest on the remaining balance, which can significantly shorten your loan term and save you a lot of money in the long run. However, it is important to carefully consider your budget and ensure that you can afford to increase your loan payments without sacrificing other financial goals.
Using work bonuses, tax refunds, or other windfalls to make extra loan payments is a great way to accelerate your debt payoff timeline and achieve financial freedom sooner. This strategy can be particularly effective if you use the windfall to make a single additional payment each year.
Before you begin making extra payments, make sure that your lender clearly states how they will apply these funds. Some lenders may automatically apply them toward future interest and fees, which can negate the effect of your efforts to pay down principal. In this case, you can ask to have the extra payment applied directly towards principal, which will help you reduce your loan balance and save on interest charges.