We all face certain life events that require us to take out a loan. Whether it’s to cover college tuition costs, buy a car, or those much-needed home renovations, loans can help us get what we need and desire.
Though taking out a loan is an effective way to cover the cost of something, it can take a while to pay it off. Plus, the longer you have a loan, the more interest rates can increase. And this accumulation can soon spiral out of control if you’re not careful. Fortunately, there are some strategies you can employ to pay off your loan quickly. Here are some of the best tips:
1) Be Prepared:
Before taking out your loan, be sure to do your research. Make sure you know exactly how much money you will need, the interest rates, and the projected timeline for repayment. It will help you create a plan and budget to ensure you can pay off your loan on time. The amount of loan you can take out depends on the kind of loan you are seeking and your location. For instance, in New Zealand, you can only take out a loan amount of up to 60% of your average monthly income. The applicable interest rate and repayment scheme are also determined by the kind of loan you are taking out.
Once you have this information, you can calculate the repayment amount and timeline you need to stick to. Check out resources like Nectar personal loan calculator to get the essence of an estimated repayment scheme.
2) Set Up Automatic Payments:
Once you have the repayment plan figured out, set up automatic payments from your bank account. This way, you won’t miss a payment, and your loan will be paid off faster. Many banks have options where you can set up automatic payments of a fixed amount each month or adjust your payment amounts as needed. For instance, if your loan repayment amount is higher than what you can afford, most banks allow you to adjust the payment to be within your budget. Talk to your bank about the available options and find one that works for you.
3) Pay More Than the Minimum:
Loan payment terms differ, but most agreements require that you pay a minimum amount each month. While paying the minimum is better than nothing, it can take an extended period to pay off the loan in full. If you can afford to, try paying more than the minimum so that you can reduce your principal balance and pay off your loan faster.
Some lenders permit making an extra payment each month. This information is mentioned in your loan agreement, so read it carefully.
4) Create a Budget:
Being organized is critical when it comes to paying off a loan. Set a budget that includes all your expenses and the amount you can allocate towards your loan payment. It will give you an estimate of how much money you have to spare each month and help you make informed decisions about where to spend your money.
You can use budgeting apps or a simple spreadsheet to stay on top of your finances and track your progress. If you’re dealing with a large loan, try breaking it down into smaller chunks that you can tackle one at a time.
5) Pay Bi-Weekly Instead of Monthly:
Interest is a necessary evil when it comes to loans. For each month that passes, you incur more interest fees. Try to reduce the time it takes to pay off your loan by choosing bi-weekly payments.
When you make bi-weekly payments rather than monthly ones, you make an extra payment yearly. It is because there are 26 bi-weekly periods in a year, which is equal to 13 monthly payments. It can help you repay your loan quicker and save on interest rates. Again, you’ll need to check your loan agreement for details on this option.
Refinancing is taking out a new loan to pay off an existing one. It can be a beneficial strategy if you’re looking to reduce your interest rate and overall loan amount. You can get a better deal with a different lender, which can make paying off your current loan more manageable. However, you should know any additional fees or terms associated with the new loan. Refinancing also has some setbacks. Some of these are:
- An increase in the amount of time it will take to pay off your loan
- Potential damage to your credit score
- Reduced equity in your property
7) Pay off High-Interest Rate Loans First:
Sometimes, some of us find ourselves in a situation where we have multiple loans from different lenders. Since interest rates vary from lender to lender, it’s important to prioritize those loans with the highest interest rate. Paying off the high-interest rate loans first is an effective way to save money on interest payments and get out of debt quicker. You should also consider consolidating your loans if you’re dealing with multiple lenders.
Consolidation is when you combine multiple loans into one with a single payment. It may make your debt more manageable and help you save on interest rates.
8) Get a Loan with a Shorter Term:
Try negotiating a shorter loan term if you want to pay off your loan faster. Most lenders offer terms of three to five years, but there are some that offer terms as short as one year. The shorter the term, the less interest you’ll pay. Of course, that increases your monthly payments, but it’s worth it if you’re trying to make a dent in your debt. Just remember to find out if there are any additional fees associated with shorter loan terms. You must also assess your financial situation and make sure that taking on a shorter loan is feasible for you.
Loans are, undoubtedly, a help in times of financial need. But it can be hard to pay them off in a timely manner. The tips above can help you out if you’re struggling with paying off a loan. Keep in mind that the best way to stay on top of your finances is to plan ahead and take advantage of any options that may help you reduce your debt quicker.