Most Americans have some type of debt. Whether it’s student loans, credit card bills, or a car loan – you may be wondering if it’s worthwhile – and how – to pay off a loan faster.
Paying off a loan early can help you save money, free up extra cash, and even boost your credit score. By following a couple of simple tips, you’ll be able to get your finances in a stronger place.
Here are some strategies for how to pay off a loan faster.
What are the advantages of paying off a loan early
There are many reasons why you’d want to pay off debt faster. Take a look at some of the most common benefits to paying off a loan early.
Save money on interest
Part of every loan payment goes towards interest. In other words, the longer you’re making monthly payments, the more interest you’re paying. Paying off debt faster can help you save money on interest in the long run.
Increase your budget
Paying off a loan early frees up cash to be put towards other means. You could use the extra money to take a vacation, fix up your apartment, or – if you’re really savvy – invest and save.
Improve your credit score
A large part of your credit score is made up of your credit utilization rate. This ratio measures your total debt in relation to your credit limit. Ideally, you want your total debt to be at least 30% or lower than your credit limit. When you pay off debt sooner, your total debt levels will drop and your credit score will get a boost.
Put more towards your future
Once you’ve paid off your debt early, you can use the extra cash you saved on interest and monthly payments to investing in your future. Put those funds towards a savings account for a short-term goal, a retirement account, or an investment account to build your nest egg.
5 ways to pay off a loan faster
When most people envision having financial freedom, zero debt comes to mind. Although you won’t see major changes overnight, small steps can turn into big improvements with time. Here are five tips on how to pay off a loan faster and get closer to reaching financial freedom.
1. Track your spending
Tracking your spending every month will help you identify areas you can cut back or cut out. You want to identify any expenses you could easily live without. For example, you can start making more meals at home, cancel that gym membership you’re not using, or find other ways to live cheaply.
By spending less, you’ll be able to use that extra money towards paying off your loan faster. The more you bump up your monthly payments, the faster you’ll get out of debt. It helps to use a budgeting app or a mobile banking app with built-in budgeting tools.
2. Stick to a budget
Once you’ve started to track your spending, the next step is to create a budget. It sounds more complicated than it really is, but in fact, creating a budget is fairly straightforward. Start by calculating your bank statements to determine your monthly income and how much you spend per category.
The most important thing is that you meet your most critical monthly expenses, which include rent, food, bills, and debt payments. From there, you want to look at excess categories you can cut out or cut back on.
Finally, set a limit for each category. This way, you’ll stay within your means and be able to focus on paying off your debt.
3. Make bi-weekly payments
This trick is subtle but can help you pay off your debt faster and generate more savings in the long run. Instead of making monthly payments, ask your lender if you can make bi-weekly payments. This way, your payments will be more frequent, and less interest will accrue.
Plus, you’ll end up making 26 half-payments each year, which translates into an extra full payment each year. Depending on the type of loan you have, the boost in frequency can mean getting out of debt months or even years sooner.
4. Pay down higher interest debts first
Debts with higher interest rates cost you more money and take the longest to pay off. One strategy is to focus on your debt with the highest interest rates first. Direct your excess income towards this debt while still meeting your minimum payments on all other obligations. Once you pay off your highest interest rate debt first, snowball the funds towards the debt with the next highest rate.
5. Increase your income
One of the best ways to pay off your loan early is to work on earning more money so you can make extra payments. Earning more money doesn’t have to be daunting. Nowadays, there are many ways to generate income through a side hustle.
You can pick up extra hours at work, offer babysitting or pet sitting services to neighbors on weekends, drive for a ride-sharing company, or sell your used clothes and other items on sites like Poshmark or Vinted. Even if you only earn one hundred dollars or so, this money can go a long way in helping you pay back your loan faster.
Savvy strategies to pay off debt
There are many strategies for how to pay off a loan faster. You don’t need to implement all of them right off the bat – just make sure to start somewhere and to stay consistent. The more consistent you are, the faster you’ll reach your goals and pay off your debt early!
Is it cheaper to pay off a loan early?
Paying off your debt early can help you save on interest in the long run. It will also free up cash to use for other expenses, like saving. However, find out if there is a penalty fee for early pay-offs.
Is it smart to pay off your car early?
If possible, try to pay off your car loan early to save money and free up cash. Again, find out if there are any early pay offs fees that may apply.
Does paying loans biweekly help?
Paying loans bi-weekly is an easy and simple way to cut off months or years from your loan’s lifetime. This hack allows you to cut down on interest and get ahead on payments.