5 tips to pay off your loans faster
- Refinancing your loans could get you a better interest rate and a shorter repayment term.
- Two common repayment strategies are debt avalanche and debt snowball.
- If you can make more frequent payments on your debt, you’ll save on interest charges.
With loans available for everything from paying for college to buying a new car or renovating your home, you may find yourself facing a growing pile of debt before you know it. Paying off these loans as quickly as possible saves you money in the long run and frees up your money to spend on other financial goals.
Most loans carry interest, the extra fees a borrower pays to use the lender’s money. The faster you repay a loan, the less interest you have to pay.
5 expert tips to pay off your loans fast
It’s possible to pay down your loan balances faster than expected, and it doesn’t have to be that complicated. These five tips can help you do just that, says Gabe Krajicek, CEO of Kasasa, a fintech company that provides financial products and marketing services to community banks and credit unions:
1. Tap into equity
Using the assets you already have to pay off your loan can help you pay off your loan faster and negate the need to do things like take another job or cut your budget. “You can use your existing capital to pay off loans,” says Krajicek. “This includes all illiquid assets, such as real estate and stocks.”
2. Refinance your loans
Refinancing your loans can get you a lower interest rate, which will save you money on your loan interest. You can also shorten your repayment term, which will increase your monthly payments but cost you less in interest.
3. Consolidate your loan debt
You may be able to consolidate several loans into one with one monthly payment, which can make it easier to keep track of your loan balance. You might even be able to get a lower interest rate, although this is more common with loan refinancing.
Krajicek recommends checking out a local community bank or credit union. Depending on the type of loan, you may also be able to refinance with an online lender or a major bank.
4. Pay more money, more often
If you are financially capable, you can quickly reduce the cost of your loan by making more payments than expected. Or, you can make larger payments at the same rate you’ve 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 debt.”
5. Ask for help
There are several options to lower your payments, get help paying off your loans, or even get your loans forgiven altogether. This could be done through government programs or local organizations. You can also ask family and friends for money to help pay off your debt and then pay them back at a lower interest rate or with no interest at all.
How to start reducing your loan balance
Making additional payments will help you reduce your balance faster. If you are able, side gigs could help you put some extra money on your loan debt. As your total loan balance decreases, your interest payments will also decrease. Set up automatic payment to make sure you don’t miss any payments.
Two of the most popular strategies for paying off loan debt are debt avalanche and debt snowball.
With an avalanche of debt, you first pay off your loan with the highest interest rate. Once your highest interest rate debt is paid off, you move on to the next highest interest rate, and so on. Doing so will save you more money over the life of the loan, says Forrest McCall, personal finance expert and owner of the “Don’t Work Another Day” finance blog.
The debt snowball method allows you to start by paying off your smallest debt first. You will pay the most on the smallest debt and the minimum on the rest.
“After that initial debt is paid off, you put the full amount of what you were paying on that debt toward the next lowest amount,” Krajicek explains. “And of course, limit the accumulation of debt while you work to pay off current debt.
What happens if I skip loan payments when allowed?
Unpaid interest during forbearance periods can increase your overall loan balance, as interest continues to accrue on larger and larger sums of money when you are not actively repaying the total you owe.
Capitalized interest is unpaid interest added to your total loan amount after periods of non-payment, including forbearance, deferment, and after any grace period (grace periods are generally for student loans). This will increase your overall loan balance and you will later pay interest on this higher amount, which will increase the total cost of your loan.
Interest can capitalize on 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. This is because if you pay the minimum, most of your money will go to interest and fees, not your total loan amount.
Making the required minimum payments may seem attractive since you will have more money in your pocket. But interest can accrue if you only pay the amount asked of you, McCall says.
“To avoid increasing your loan balances, be sure to make payments above the minimum payments,” says McCall. “Because minimum payments are primarily interest-based, you need to ensure that you make payments larger than that, otherwise interest may continue to accrue.”