How to pay off debt sooner

0

In the second quarter of 2022, the amount of consumer debt in the United States stood at over $16 trillion. Many Americans face extreme financial hardship, regardless of age, education, and income level, due to crippling debt. Whether you’re overwhelmed with student loans, credit card fees, or a mortgage you can’t afford, debt can cause you serious financial problems.

Being in debt can be a slippery slope, so you should do everything you can to pay off what you owe as quickly as possible. Most banks allow you to prepay a loan, but it won’t be easy. You must pay a minimum monthly amount for this debt, and the minimum will not allow you to clear your debt quickly. If you want to be financially stable, know how to pay off debt early and the pros and cons of doing so.

Get pre-qualified

Answer a few questions to see which personal loans you are pre-qualified for. The process is quick and easy, and it won’t affect your credit score.

Benefits of Prepaying Debt

There are several benefits to paying off your debt early, and almost all translate to more money in your pocket each month and more financial freedom to achieve other goals.

No monthly payments

The more bills you have to pay, the more complicated and expensive your financial life can become. As you pay off each of your debts, you will have fewer obligations to meet each month. “As a result, your bill-paying process will become easier and faster, and you’ll be able to keep more of your money in the bank,” said Leslie Tayne, founder of Tayne Law Group.

In addition to getting you out of debt faster, paying off your debt early provides mental relief that can be hard to quantify. According to a FINRA report, 60% of adults in the United States feel anxious about their personal finances, with high debt being a major contributor to their anxiety.

Save money on interest

When you have high-interest debt, like credit cards or personal loans, it’s quite expensive to make minimum monthly payments. Plus, each month you carry a balance in the account, your previous purchases become more expensive due to compound interest. “But, if you pay off all the debt, you can save a lot of money in interest payments that you won’t have to pay,” Tayne says.

For example, if you have a $20,000 personal loan with a minimum monthly payment of $400 at 7.5% APR, you will pay a total of $4,055.39 in interest charges. If you can afford to pay an extra $200 per month – for a total monthly payment of $600 – your total interest charges for the loan are $2,497.50. This represents an overall savings of $1,557.89.

Improve your credit profile

When you pay off debt, it lowers your credit utilization rate, which is the amount of debt you owe relative to the total amount of credit you have access to overall. Reducing your utilization rate generally improves your credit profile and credit score. Therefore, you will likely have access to better interest rates in the future.

“The FICO credit-scoring model encourages borrowers to keep their credit utilization rate at 30% or less,” Tayne says. “This means that if you have a $1,000 line of credit between your revolving credit accounts, you must maintain your total balance owing at $300 or less.”

With an improved credit score and better access to competitive interest rates, your future borrowing needs can be more affordable during your term.

Increase your savings account

One of the biggest benefits of paying down debt is the free money you will now have to meet other financial goals and priorities. Ideally, you will use some of the money to increase your savings account, which can save you from going into debt again. “If you have a surprise bill, you can cover it without using your credit card and repeating the debt cycle,” Tayne says.

Disadvantages of early debt repayment

It’s generally a good idea to try to pay off your debt as soon as possible, but there are some situations where it just doesn’t make sense.

Less liquidity to invest

If you receive a large sum of money and apply it to your debt, you will not be able to invest it and earn interest on it. It might make more sense to put that money in an emergency fund, a retirement account, or invest it in a high-interest savings account instead.

Possible prepayment penalty

In addition, some loans carry penalties for early repayment. Know if your loan comes with this type of hefty financial penalty before repaying the loan early. It may be wiser to put the money in an interest-bearing account instead and continue to make monthly payments for your loan rather than paying those unnecessary prepayment penalties.

Carefully consider where the money comes from before using it to pay off your debt. If the money is in savings for emergencies, it may not be wise to deplete that fund, especially if it puts you in a position where you’re more likely to use a credit card and accumulate new debt at a high interest rate.

How to plan for debt prepayment when you take on debt

If you are considering prepaying a loan, there are several ways to go about it. You don’t necessarily have to make a giant payment. It might be smarter to pay it off sooner with other methods.

Pay extra when you can

One of the most effective ways to pay off your debt before it’s due is to pay more than you owe. Start by paying more than the minimum amount each month, but only when you have extra money to spend. Make sure you always have enough funds to cover rent, food, childcare, transportation, and other day-to-day expenses.

Paying more than the minimum is the only way to reduce your debt, as it will offset the interest you accumulate. For example, if the minimum amount is $150, pay $300 instead when you can while maintaining the monthly minimum when funds are limited.

For example, if you receive a work bonus in December, use that money to make an additional payment. Keep in mind that the more you owe and the longer the term of the loan, the more you will benefit from an additional payment.

Make payments every two weeks instead of monthly

Paying money on your debt every two weeks can make you more accountable than a monthly payment schedule. This method isn’t the fastest way to pay off your loans, but it’s manageable for most people and will help reduce the amount of interest you pay. If you switch to a bi-weekly payment plan, you will have made the equivalent of one additional payment each year.

Review lender payment programs

Some banks and loan providers offer special programs designed to help borrowers pay off debt faster. However, keep in mind that these programs may incur additional charges. Still, sometimes lender payment programs can be worth the extra money or money. If you find yourself underwater, you can also consider a debt management program through a credit counseling agency.

The bottom line

If you’re struggling with mounting debt, it’s not too late to act. Set a budget, live within your means, and do your best to avoid further debt. In most cases, it’s best to focus on paying off one debt at a time.

If you have student loans, mortgages, and credit card debt, figure out which one has the highest interest rate and try to pay it off first (hint: it’s probably your credit card). This can prevent you from accumulating debt elsewhere or overpaying for your debt and being unable to pay necessary expenses like rent.

The first step to financial freedom is to pay off your debts as soon as possible. Fortunately, there are dozens of resources at your fingertips to help you take charge of your financial situation and live debt-free.

Share.

About Author

Comments are closed.