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How to pay off loans faster

Loans and the unavoidable interest rates that come with them can put your entire financial life on hold. They affect your monthly and annual budget, your credit score, and any plans you may have for your financial future. You might think repaying your loans slowly and steadily is the key, but being strategic and fast can save you a lot of money in the long run.

 

Paying your debts faster saves you money

 

Whether it's student debt, credit card, auto debt, mortgage payments, or a personal loan, your debt isn't going to wait silently for you to reach your financial goals and ideal income before you start repaying. Interest rates grow over time, increasing the principal you have to pay back. You're always at risk of having your interest rates shoot up if you do not have a fixed-rate loan, taking you back to square one on your journey to financial freedom.

 

If you have multiple debts competing for your income, determining which payment takes priority can hinge on your unique situation. Focus on tackling the one kicking your budget out of whack first. For instance, if your credit card debt has a high-interest rate, direct your financial energy toward paying that back first to minimize your expenses. If you’re using your credit cards for essential, everyday living — like paying your bills or filling your tank — it might be more challenging to pay down the balance. If your credit card balance remains high, that could negatively impact your credit score, and taking advantage of a good score on your credit card can have long-term benefits.

 

On the other hand, if all your debts look more or less the same, turn your attention to the number. It's easier to write one debt or two into your monthly budget instead of four or five. Start by paying off your smallest debt first while making minimum payments on your other debts to avoid penalties.

 

Save money or pay off loans

 

When it comes to  paying down debt, it's important not to get sucked into the process of forwarding every excess penny toward it. Sure, focusing your financial energy toward paying off your loans will allow you to pay them down them faster, but you may end up in the same situation that put you in debt in the first place. Major life events and emergencies won't take a break to let you pay off your credit card debt and car loan.

 

Setting aside money for an emergency fund is just as important as repaying even your most urgent debt. Having some money put to the side for emergency savings that you can dip into when needed could help you mitigate the next financial crisis by not relying on your credit cards or high-interest loans.

 

Snowball method of paying off loans

 

There are multiple approaches and methods when it comes to debt repayment. While asking for guidance from a financial advisor would be ideal, it's typically safe to rely on a proven way to pay off your debt.

 

One debt repayment strategy recommended by financial advisors is the snowball approach. As the name suggests, the snowball method of paying off loans involves starting small and increasing as you pay down debt. Regardless of interest rates, the snowball method instructs you to start by paying off your smallest loan first while minimizing or postponing other payments when that’s possible.

 

The debt snowball plan can be a great confidence and morale booster. When the payments themselves are small, it's easier to commit to them long-term. Since smaller debts would take, on average, less time to pay in full, you'll be reducing the accumulation of interest rates that would've otherwise stayed the same if you were focusing on repaying your largest loan.

 

Another benefit to the snowball method is progression. This strategy may help you get a better handle on your financial situation bit by bit, instead of having to uproot your current budget to accommodate massive payments.

 

The snowball method vs the avalanche method

 

A different approach you could take toward debt repayment is the avalanche method: knocking out the loans with the highest interest rate first. It aims to minimize the amount of interest you pay in total even if the road to debt-free is slightly longer than it would be with the snowball strategy.

 

Taking up the avalanche method requires a lot of motivation. The debt with the highest interest rate tends to be the biggest in sum as well. It'll be a while before you minimize the number of debts you're repaying simultaneously, and it'll be harder to commit, as individual payments are likely to be larger than that of your smallest loan with a lower interest rate, but the long-term savings in interest will be the advantage using this method.

 

Increasing the frequency of your loan payments

 

Using various loan repayment strategies and consolidating your debts through loans and existing equities can only take you so far. The best way to pay off your loans fast is to increase the frequency and amount of individual loan payments. Not only will this shorten the timeline of you in debt, but it'll also reduce the overall interest you're paying.

 

Instead of monthly payments, consider applying for a weekly payment plan, especially for bigger loans like mortgages and student loan payments. That way, making minimum payments will always be at the forefront of your mind, not to mention that the amount of every payment would be smaller, making it easier to manage. Even if a structured loan payment strategy isn’t available from your lender, making multiple payments that coincide with your paycheck or direct deposit so that you have paid the total amount due by the monthly due date may make the payments easier to manage from paycheck to paycheck.

 

If you are paying ahead, be sure to note with your payment if you are paying ahead on the principal. If not, your payment will be applied to your next payment due rather than tackling your original loan amount. There are advantages to both, so be sure to let your lender know how you want any extra payments applied.

 

Getting help for specific types of loans

 

Student loan borrowers are at a higher risk of delinquency and facing financial problems than other types of borrowers, so if you're still struggling with student loan repayment, you can reach out for professional assistance to help you manage repayment, change collection, or cancel your student loan debt altogether with loan forgiveness.

 

If you choose to seek assistance from a third party for credit counseling, be sure to use a reputable service. Non-profit options are not looking to make financial gains from your debt situation, so start with a trustworthy option focused on helping you resolve your debt.

 

Getting rid of hidden expenses and debit card fees

 

Chances are that you've spent at least a little time looking for unnecessary expenses that you can eliminate and put towards becoming debt-free. Easier said than done, but you might have taken some first steps, like canceling streaming services or subscriptions you rarely use.

 

Hidden fees, though, are more insidious and can accumulate to hundreds of dollars a month. Focus on finding a deposit account that fits your spending style. If you prefer to use your debit card or have cash on hand, start by looking for a bank with minimal transaction fees and little to no ATM withdrawal fees (or ATM withdrawal fee refunds), allowing you to use cash more often. Also, stick to in-network ATMs, as third-party machines tend to charge higher amounts per withdrawal.

 

If you utilize tap-to-pay, mobile apps, or online banking, it’s a priority to know how and when your money moves from account to account and if there are any fees associated with the movement of your money. Sometimes it is easy to lose track of where you have extra funds when they are located in multiple locations. Simply streamlining to one payment source may allow you to tap into a little extra money every month.

 

Whenever possible, sign up for rewards programs that offer cash back instead of points or fixed rewards, as the cash can go directly into your budget and help you pay off expenses and debts.

 

Using your existing equity to pay off loans

 

When repayment options are limited, you may have to resort to using your existing equity to pay off loans. Existing equity includes all non-liquid assets you may have: anything from real estate and shares to warrants and stock. You may also want to look into  bankruptcy basics to figure out whether this is a good option for you, whether you're an individual or a business owner.

 

If you are a homeowner, your options may involve taking out a home equity loan, which may or may not be beneficial for your situation. Let’s take a closer look at how these work and whether they might be a possibility to pay down your debt.

 

Can you pay your debt with a home equity loan?

 

Tapping into the money you’ve invested in your home allows you to borrow against your home's equity. How much you can expect to get depends on the difference between your home's current market value and the mortgage balance due — your home’s equity. What makes home equity loans different from standard loans and an excellent choice for debt repayment is the fixed interest rate.

 

As a type of debt consolidation, home equity loans have highly flexible repayment terms, starting at 5 years and going up to 30, depending on the amount borrowed and your financial situation. And because these are secured loans, they typically have lower interest rates.

 

Home equity loans vs HELOCs

 

When it comes to putting your home on the line as insurance for a loan, it's important to have a thorough understanding of the types of loans you can get. With standard home equity loans, you, as the borrower, are given the funds up front. In return, you must make fixed payments and repay the entire sum plus interest within the given window. While terms and payment structure vary, more often than not, you'll be asked to repay your home equity loan on a monthly basis until the end of the loan term.

 

One of the downsides of taking out a home equity loan is your inability to increase the initial borrowed funds without taking out another loan with a different interest rate. And of course, the stakes are incredibly high when your home is on the line.

 

HELOC stands for Home Equity Lines of Credit, and these are considered a variable of property-backed equity loans. Instead of giving you a predetermined sum of funds, a HELOC allows you to tap into the equity as needed up to a certain extent. As a result, HELOCs have a variable interest rate, and the payments aren't fixed, depending on the funds you take out. When it comes to repayment terms, these credit lines require you to only pay the interest rates for the duration of the term, then pay the full amount at the end of the agreed-upon term.

 

While HELOCs are more flexible in terms of the funds you can withdraw than home equity loans, they have their own downsides. For one, payments fluctuate all the time, making it much harder to plan for an upcoming financial year or monthly budget. Another downside is the wildly unstable interest rates that are linked to market value, making it harder to keep up.

 

When you should and shouldn't use existing equity loans to pay your debts

 

Student loans and credit card debt are unsecured debts. Having them accumulate without making regular payments can harm your credit score, but that's about it. There is no tangible collateral risk of not paying an unsecured debt on time — no one can repossess your college degree. Existing equity loans, on the other hand, are secured debts, meaning that your equity in your home is the underlying asset used for collateral in case you fail to make adequate payments. In other words, if you fail to repay your equity loans or to negotiate an extension, your equity (in this scenario, your home) belongs to the bank, which could initiate foreclosure proceedings against you, resulting in you losing your home. Definitely not the ideal debt situation.

 

You should only consider HELOCs and home equity loans if you need the funds in order to repay a massive debt with a crushing interest rate in comparison to a more flexible home loan. Avoid taking out anything more than necessary, and, after you have settled your original debt, repaying your home equity loan or HELOC should be your top priority.

 

Tapping into your retirement account for funds

 

When loans and interest rates are piling up, any source of money can be a lifesaver. If you’re really in a pinch, consider dipping into your retirement accounts. Normally, it's a bad idea to drain your 401(k) account, regardless of how much money you have invested or how far away you are from retirement age. The increase in tax on your withdrawal can be worth it if you're under crushing debt that could increase into infinity the longer you are just making minimum payments.

 

With a loan, you can borrow from your own retirement account if you're not eligible for standard loans due to lack of steady employment or poor credit score. You'll be able to settle your loan and pay yourself back without draining your retirement savings and ruining yourself financially.

 

(Tip: Be mindful of the fees and taxes that are associated when withdrawing money from a retirement account.)

 

How to choose the best personal loan?

 

There are a lot of moving parts to consider when choosing a loan: interest rate, fees, monthly payment amount, and repayment period are among the most important. A Kasasa Loan® will give you total control over these variables and help you borrow smarter instead of racking up more high-interest credit card debt when it can be avoided

 

You don’t get charged any fees, and our unique Take-Back® feature lets you reclaim money you’ve already paid toward your loan, giving you access to funds when you need them most. A Kasasa personal loan gives you flexibility for life’s uncertainties, so you can get out of debt faster and still be prepared for life's next curveball. Learn more about the Kasasa Loan for getting out of debt faster.

Tags: Debt management, Borrowing

About Kasasa

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