How to Pay Off Loans Early and Get Out of Debt Faster
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The easy way to get out of debt fast is to have less debt in the first place. But let's be honest: repaying a loan early is easier said than done. You may have to make an emergency visit to the doctor's or maybe pay a hefty car repair bill ... life happens! These expenses can run into the thousand dollars-mark, and you may have to turn to credit card debt or sign up for an installment loan to get out of these situations. Matters could be made worse if your credit history isn't too good. This is why experts recommend having an emergency fund.
There are many ways to get out of debt, but you will need to change your lifestyle to get the results you oh-so-want. Spending less and prioritizing your finances is a good start. It will help you significantly reduce the amount of debt you have and make it easier to begin your journey toward becoming debt-free.
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How to pay off loans early
Financing a purchase can be expensive, and sometimes it's difficult to pay off the loan in full on time. To get out of debt faster, you first need to address the causes of your debt. Perhaps it was overspending, a job loss, or a case of identity theft. Once you've locked that down, you can retool your approach accordingly. But know this: the bigger your debt is, the harder it will be to repay it and the longer you'll remain in debt.
Fortunately, you can use a few strategies to pay off your loans early.
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Budgeting and savings
Stop wasting your money, y'all! One of the best ways to start addressing your debt is to review your budget and see where you can cut back on your expenses to free up more money to put towards your debts. Start by making a budget of your monthly income and expenses to see what you're spending your money on and identify areas where you might be able to cut back. Once you have finished reviewing your budget, you need to make some changes to reduce your spending. The new iPhone 14 looks sweet, but maybe your iPhone 12 is still going strong. Coffee is good, but going to Starbucks thrice daily isn't!
Another important factor: Your savings. To get more money, you need to save first. You can try and take out any savings you already have and increase that amount if needed. Not touching your existing investments without careful consideration is important because they represent a major portion of your future financial security. While investing may cost you in the short term, it can help you earn greater returns and allow you to reduce or even eliminate your outstanding debts gradually. And you don't need a lot of money to begin investing. Fractional investing exists, and there are many micro-investing apps you can choose from.
Pay off highest-interest or smallest balance loans first
It's a good idea to pay down your highest-interest loans first to get the most benefit out of your money. In personal finance parlance, this is called the debt avalanche method, and it will save you a lot over the life of the loan. Here's how it works: Say you have a $5,000 loan at 9% interest and a $10,000 loan at 7% interest. This debt repayment strategy stipulates that you focus on paying off the $5,000 loan first since it costs you more in the long run. Once that loan is paid off, you can focus on paying off the $10,000 loan.
Another approach, the debt snowball method, involves paying your loan with the smallest balance first. Both of these strategies bring down your loan balance and can help you save money and reduce your overall debt load over time.
Make an extra payment every month
If you can't afford to pay your entire loan off at once, you can try making an extra monthly payment. By making a little extra, you're effectively lowering your interest rate and saving money in the long term. For example, if your monthly payment on a $20,000 loan is $300, you could save thousands of dollars in interest payments by making a one-time payment of $3,000 on your loan amount rather than $300 each month. Less interest is always good! Making extra payments can help you reduce your overall debt and build your credit score over time while lowering the amount of interest you pay.
In addition, if you have a tax refund coming in the mail this year, you can use your refund to make additional payments on your loans to help reduce your debt more quickly. This is particularly useful for people with high-interest loans who can pay extra on their debt without hurting their monthly budget. If possible, try to put as much of your refund as you can toward your debts, so you don't have to use credit cards or other forms of debt to pay the balance in the future.
You could also consider making bi-weekly payments. This will bring down the interest portion of the payment, and it also cuts down the term of the loan, i.e., your loan will be paid off earlier.
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Consider refinancing your loan
If you can qualify for a new loan with a lower rate, you should consider refinancing your current loan to save money over the long term. In many cases, you may be able to get a lower interest rate by refinancing your auto loan or home loan. As always, you shouldn't just visit the lender and sign up. Shop around and compare rates from different lenders before choosing a loan with the lowest interest rate possible.
But what about student loans? Many borrowers struggling with high interest rates on their student loans may be eligible for lower interest rates if they refinance their loans with a different lender. Again it's important to do some research before refinancing your student loans.
Talk to your lender
If you have a good credit score and have been making on-time payments, you may be able to negotiate a lower interest rate with your lender. In addition to saving money by lowering your interest rate, you may be able to reduce your monthly payments by extending the loan term. If you're in good standing with your creditors, there's a high chance they'll at least seriously consider this option. However, it's important to keep in mind that you may pay more in interest over the long term if you choose this option. Make sure that you understand the new loan terms before you sign the loan agreement to make a well-informed decision about your financing plan.
Take advantage of special discounts
Chances are your lender offers special discounts, and you're unaware of them. Most lenders offer special deals to customers who qualify for a reduced interest rate or other special discounts. Even if you can't qualify for a lower interest rate, you may be able to take advantage of other special discounts offered by your lender. These discounts can help you save money on your monthly loan payments. You should contact your lender to learn how to take advantage of these discounts and save extra money on your monthly loan payments.
Get a side hustle
If you have a stable job with a good salary, consider a side hustle to earn extra money. For example, you could take a second job on the weekends or evenings to earn additional income. You could also look for freelance opportunities in your field to increase your earning potential. Upwork, Freelancer, and Fivver are three of the biggest freelancing platforms.
Having a side hustle is a great way to earn some extra income that you can use to pay down your debt faster. You could become a delivery driver for Instacart or DoorDash, or join one of the ride-hailing companies to earn extra cash. You could babysit, walk dogs, pet sit, or work odd jobs like data entry for part-time money. You could create a blog or even monetize your social media accounts by advertising products or services for sale. The opportunities are essentially endless!
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Beware of prepayment penalties
If you do choose to prepay your loan, it triggers a clause in your loan agreement that's meant to dissuade borrowers from repaying a loan early. This extra charge is called a prepayment penalty, and lenders charge this fee because when you repay a loan early, they lose out on interest income.
While home loans, such as FHA and USDA loans, as well as student loans are excluded, personal loans generally aren't. In most cases, when you prepay a loan within the first year, you can expect to pay 2% of the outstanding balance. Some loan types charge a higher penalty, but in most cases, the penalty is capped at 2%. The longer you wait to prepay the loan, say in the fourth year (0.5% of the outstanding balance), the lower your prepayment penalty will be.
Prepayment penalties can also be fixed or they could simply be the amount of interest the lender is missing out on. In the case of mortgages, a 20% prepayment penalty is common. This is why you should pay close attention to the fine print in your agreement to remove any surprises in the future. And if you're unsure if you'll be charged this penalty, you should reach out to the lender and ask.
The bottom line
The easy way to get out of debt fast is to have less debt in the first place. But if you're already in debt and want to pay it off quickly, you’ll need to make some serious cutbacks in your lifestyle. Of course, cutting back on your expenses isn't easier because you're just so used to things. But there will be some sacrifices you’ll have to make along the way. But it will be worth it in the long run when you find yourself finally free of debt!
There are a lot of factors that can impact how long it takes to pay off a loan. For example, the size of your monthly payments and the interest you pay on them influence your debt repayment time. The longer you have a loan, the more interest you will ultimately have to pay. As a result, you may pay considerably more for your loan over time than you would if you had paid it off sooner.
Applying the tips identified in this article can help you save significant money over the long run and help you reach your financial goals. By taking advantage of one or more of these options, you should be able to reduce the amount that you pay for your loans each month.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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