It's not a lot of fun having outstanding debts. If you want to know what the most significant cause of stress is in life, then look no further than debt. That's why it makes a lot of sense to pay your loans faster, and having your debts repaid as quickly as possible. Apart from the stress aspect, there are practical reasons as well.
The sooner you eliminate your debts, the lower the interest costs are over the long term.
Warning!You need to be aware that on some loans, early repayment may incur additional penalties. Make sure you are aware of your terms and conditions. With credit cards, however, this is not the case. If there is no early repayment penalty, you should pay back your debts as quickly as possible. Let's look at some tips on how to go about repaying your debts ahead of schedule.
1. Make More than the Minimum Payment
Consumers often make the mistake of paying the minimum monthly payment. That is exactly what the banks want you to do. It's how they keep the fish on the hook for as long as possible. How do you think banks make money? As long as you have a debt with them, the interest rates are adding up. The money in your account is just flowing into the vaults of the bank or your lender. Sure, if you pay the minimum, you might think that you are holding on to more of your own money. But that, in fact, is not true. You should always try to pay more than the minimum.
The Maths of Interest Charges
You have a credit card debt of $2000. The interest rate is 18%. That means you would pay an additional $360 in interest on a $2000 deficit making minimum payments. By lowering the principle quickly to $1000, your interest costs are $180.
On a larger scale look at a $300,000 mortgage over 15 years at 5%. The repayments are $2372. By paying just $200 more on each payment, the loan is reduced from 15 years to 13.4 years and the interest from $127,029 to $111,653. That’s almost $16,000 that stays in your pocket.
By making fortnightly payments on any loan instead of monthly repayments, you are making an extra amount per year. Why? Well, it’s 12 monthly payments compared to 26 fortnightly payments. By reducing the principle each fortnight, it means the interest rate is applied to a lower amount.
2. Debt Consolidation
A consolidation is a good option if you have debts with multiple lenders. You can place all your obligations into one big loan, and you will probably have a more favorable interest rate as well. The significant advantage is that you are less likely to miss payments when you have just one payment a month to make.
3. Pay Your High-Interest Rate Loans
Your loans will probably all have different interest rates. For example, if you have two credit cards and one has an interest rate of 8% and the other an interest rate of 18%, transfer the balance from the higher interest rate to the bank that is providing you with the lower interest rate.
Important!If that's the case, it makes sense to pay off the loan or credit card with the highest interest rate first. Look for deals that allow you to transfer card and loan balances from a higher interest rate to a lower one. Over a period, that can cut your costs significantly.
4. Renegotiate Your Loan Terms
Lenders are not uncaring monsters, and instead of you defaulting on a loan, which for them, and you, is the worst case scenario, they are prepared to work with you to ensure the debt is repaid. If you are in the situation of being unable to make a repayment on time, call your lender. In some cases, and with most lenders, you can arrange a reduced interest rate or even a loan payment deferment.
Have you exhausted all your options? Are you sick of the constant battle to lower your debt and try to get somewhere? Bankruptcy may be the best course of action. If there doesn't seem to be a way out of your financial problems, then bankruptcy will discharge all your debts and free you from the constant calls and demands from lenders. Bankruptcy is a last resort and depending on the state law. You could be looking at 7 -10 years of finding it difficult, if not impossible, to get any loan.
6. Make Extra Income
There are plenty ways to earn more these days. There are websites like eBay and Etsy and Amazon on which you can sell stuff. They are things you have sitting around at home that you no longer use. You don’t need to be making $100 a week. Even $20 a week is $520 a year. Take that amount of your credit card debt or loan principle. It all adds up.