So, you have debt, which isn’t great but on the flip side, you have a little extra money on hand. So, is it better to pay off your loans early or should you just keep on making the normal monthly payments?
You can only make the decision once you have evaluated what you get from the loan against the cost of keeping the loan around. You will be able to save quite a lot of money when you get rid of your loan debt early, but it might not always be the best thing to do.
Here is a look at the benefits of paying your debt early and how you can do this.
The Benefits of Paying Your Debt Early
Save Money by Paying Off Loans
The best reason that you will want to pay off debt early is so that you can save money and stop paying the interest. The interest that you are charged doesn’t actually buy you anything, but rather gives you the ability to pay slowly.
There are loans that can drag on for years and the interest on these can certainly add up. Other loans may have a shorter term, but these generally carry a higher interest rate, which then makes them more expensive. When it comes to high cost debt, you should definitely be paying more than the minimum.
So, when you pay your debt down early, you won’t be able to use that extra money, which could mean that you will not be able to enjoy those extra luxuries in the month or you will have a smaller financial cushion, which may make it harder to pay for any surprise expenses.
Also, you will have to come up with extra money to put towards other goals that you may have like your retirement or making a down payment on a home, for instance.
However, paying off loans early saves you money on the interest and you can stop paying a monthly repayment, which you can then use to save.
Wait…There are still more benefits to know…
Give Your Finances Strength
You will become stronger financially when you pay down debt. The money that you have been putting towards the monthly repayment will become available and you can use this for other purposes and it can be used to fund your other goals.
You will also become a more viable option for lenders. Lenders have to be sure that you have enough money to repay loans and that any loans that you have aren’t eating up too much of monthly income, which is known as your debt to income ratio. Your debt to income ratio improves when you pay off debt and this will help you to secure a loan in the future.
Also, when you pay down debt, your credit score can also improve. Part of your credit score is based on the amount that you are borrowing in relation to the maximum that you potentially could borrow. If you have maxed out then you will have a low credit score, but when you pay down debt that you have, you will create more wiggle room.
There are some that just hate debt, so they pay off loans as soon as possible, which is fine as long as you know what you are doing.
You might be looking for peace of mind so that you don’t have to worry about debt. Your goal might be to eliminate any debt that you have before you retire or you might just be sick of paying monthly payments.
When you are looking at paying off debt, you need to look at the big picture and make a decision that you are able to live with and makes the most financial sense.
So, how can you pay off your debt early?
How to Pay Off Debt Early
In many cases paying off debt earlier just involves sending extra money, whether you pay a little extra each month or you just do it all at once. You can ask your lender how you can do it so that your payments are correctly credited to your account and so that you know exactly the amount you need to send.
Here are some tips on how to pay off debt early.
Just Send Money
The easiest way to pay off your debt early is to pay a little or even a lot extra when you are able to. This is also the hardest strategy to implement as you will need to have discipline to do this.
However, if you are confident in your ability to send extra payments and pay off your debts then just send extra payments.
When you send these extra payments, you should include a note that says ‘apply to principal’ so that your lender doesn’t get confused and they see that you are trying to pay extra. If they need things to be done differently they will contact you.
Just the One Extra Payment
You will be able to pay off debts quicker when you add an extra monthly payment each year. You can pay the extra monthly payment anytime during the year as a lump sum, but if you are like most people and you find it hard to come up with the extra payment, you can spread this extra payment throughout the year.
You can divide the monthly payment by 12 and add that amount to each of your monthly payments. This will help you to pay your debt off earlier.
Try Biweekly Payments
Instead of paying every month, you can look at paying every two weeks, which will be the same as one extra payment per year. When you go for the biweekly option, you will see a huge change in your monthly expenses, but you will also save huge as you pay off your debt over the years.
Help from Your Lender
You should speak to your lender as they may have options available that will help you to pay off your debt more quickly. However, be careful as these programs may have additional fees attached. You need to see if these programs are worth it to you and if they are, then pay the fees.
If you don’t want to pay extra fees, then you can find a way to pay extra and avoid the fees like automatic monthly payments that you can set up through your banks’ online banking portal. Just make sure that you attach a note that says ‘apply to principal’.
When you are paying off your debt, you will need to exercise discipline so that you can get it done. It can be tough to pay extra on your monthly payments but in the long run, you can save money. Make sure that you will be saving more than what it is costing you. You need to make an informed decision about paying off your debt off early but paying off loans early can be a huge financial relief.