- Refinancing your loans could give you a better interest rate and a shorter payment term.
- Two common repayment strategies are the debt avalanche and the debt snowball.
- If you can make more frequent payments on your debt, you will save on interest costs.
With loans available for everything from paying for college to buying a new car or renovating your home, you can find yourself facing a mounting amount of debt before you know it. Paying off those loans as quickly as possible saves you money in the long run and frees up your cash for other financial goals.
Most loans come with interest, the additional charge a borrower pays to use the lender’s money. The faster you pay off a loan, the less total interest you’ll have to pay.
5 expert tips to pay off your loans fast
It’s possible to reduce your loan balances faster than scheduled, and it doesn’t have to be that complicated. These five tips can help you do just that, says Gabe Krajicek, CEO of Kasasaa fintech company that provides financial products and marketing services to community banks and credit unions:
1. Take advantage of equity
Using 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 look for 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, saving you interest on your loan. You can also shorten the length of your payment term, which will make your monthly payments higher but cost you less in overall interest.
3. Consolidate your loan debt
You may be able to consolidate multiple loans into one with a single monthly payment, which can make it easier to keep track of your loan balance. You may even be able to get a lower interest rate, though that’s more common with loan refinancing.
Krajicek recommends checking with a local community bank or credit union. Depending on the type of loan, you can also refinance with an online lender or a large bank.
4. Pay more money, more often
If you have the financial capacity, you can quickly reduce the cost of your loan by making more payments than you scheduled. Or, you can make larger payments at the same rate you’ve already been paying.
“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 unexpected expenses don’t stop just because you’re on a mission to pay off your debt.”
5. Seek help
There are several options to lower your payments, get help paying your loans, or even get full loan forgiveness. This could be 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 no interest at all.
How to start reducing your loan balances
Making additional payments will help you pay down your balance more quickly. If you can, side jobs could help you put extra money toward your loan debt. As your total loan balance decreases, so will your interest payments. Set up auto pay to make sure you don’t miss any payments.
Two of the most popular strategies for paying down loan debt are the debt avalanche and the debt snowball.
With a debt avalanche, you pay off your loan with the highest interest rate first. Once the debt with the highest interest rate is paid off, it moves on to the next highest interest rate, and so on. By doing so, you’ll save more money over the course of the loan, says Forrest McCall, personal finance expert and owner of the finance blog, “don’t work another day.”
The debt snowball method allows you to start by paying off your smallest debt first. You will pay the maximum on the smallest debt and the minimum on the rest.
“After this initial debt is paid off, roll the full amount of what you were paying on this debt down to the next smaller amount,” says Krajicek. “And, of course, limit the accumulation of more 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 total loan balance, as interest continues to accrue on ever-increasing amounts of money when you’re not actively paying the full amount you owe.
Capitalized interest is unpaid interest added to your total loan amount after periods of non-payment, including forbearances, deferments, and after any grace period (grace periods are typically on student loans). This will increase the total balance of your loan and then you will pay interest on that higher amount, increasing the total cost of your loan.
Interest can capitalize any type of loan.
What happens if I only make the minimum loan payment?
Paying less than the recommended monthly amount can increase your total loan balance. That’s because if you pay the minimum, most of your money will go to interest and fees, not the full loan amount.
Making the required minimum payments may seem appealing since you’ll have more money in your pocket. But interest can add up if you only pay the required amount, says McCall.
“To avoid increasing your loan balances, be sure to make payments greater than the minimum payments,” says McCall. “Because the minimum payments are geared primarily toward interest, you want to make sure you’re making payments higher than that, otherwise interest can continue to accrue.”