Loans can be excellent tools for achieving your purchase or investment goals more quickly. However, every loan comes with accumulated interest payable by the borrower. As such, the sooner the borrower repays a loan, the more they will save on the costs of the loan. You can pay off a loan faster if you save more, pay more often, and budget effectively. Here are some tips:
Lump sums and windfalls
Use any lump sums or windfalls to repay your loan. Instead of spending the proceeds from a lottery win, your tax return, or selling your car, use the extra money to pay off your loans and save on interest.
Pay more often
Make weekly or fortnightly repayments instead of monthly repayments. Even if your total monthly repayments remains the same, this strategy can save you on interest because you are paying more frequently.
Pay in proportion to income
When your income increases, increase your loan repayments in accordance with your raise rather than being tempted to spend the extra money.
Commit to paying more rather than the minimum required repayment. An extra $50, $100, or $500 could save you a considerable amount on interest over the term of the loan.
Be aware of fees
Check the loan agreement for any extra fees or charges that might apply if you make extra repayments. In some cases making extra repayments could attract fees, and sometimes extra repayments may not be allowed.
Use offset accounts
Use an offset account to reduce the amount of interest you pay. The balance of the account is used to offset the total loan amount, so the borrower’s interest bill is lowered. Offset accounts are not available for all loan products, but many institutions allow mortgages to maintain an offset account linked to their mortgage.
Round up repayments
Rounding up repayment is a simple yet useful strategy for repaying more without too much effort. Depending on the repayment amount, you could round it up to the next hundred or thousand
Pay the loan first
Aim to pay your loan first and as soon as you receive your salary or wages. This habit will reduce the temptation to spend too much and make it easier to pay above the minimum repayment amount.
If you have a number of loans to pay off, you might be able to reduce your interest bill by consolidating your loans. This is possible where the new lender or financing product offers a lower interest rate.
Refinancing to a new lender could also allow you to take advantage of lower interest rates. However, do consider the costs of the loan and any additional fees and charges when refinancing.
When interest rate drops, some types of loans, such as home loans, can have a corresponding drop in repayment amounts. Instead of paying less, commit to paying the same amount in periodic repayments. This will be manageable as long as your income has not declined.
Budget and save
Budgeting and saving are crucial for paying off loans faster. Creating a budget encourages you to be more conscious of how you are spending money. With a budget, you’ll be able to track your expenses and keep to a savings goal. There are numerous free apps or spreadsheet templates that make budgeting easy, but a budget can be as simple as recording your expenses and income in a notebook.