If you can make extra repayments on your loan (whether it’s a mortgage loan, car loan) or your credit card debts, no matter how small, you will absolutely pay down your debt faster. You will save money in interest payments and take a huge load of your shoulder.
Here’s how I reduced my small Sallie Mae loan in a short period of time. Remember these tactics can also be used if you have credit card debts, car loans, or mortgage loan.
During the summer of my junior and senior years in college, I took a small Sallie Mae Loan for $6000. Things were really bad for me then and I needed that loan to survive during the summer when I did an unpaid internship in Washington D.C. The loan, plus the fee added, came about to $6500.
The interest rate on the loan is 13%, which kicked in a month after I took out the loan. The minimum monthly repayment of the amount is around $86. I started paying the minimum repayment of $86 two years ago, only to realize that only $13 goes to the principal and $73 goes toward paying the interest.
For two years, the loan stayed around the same $6300, $6350; it did not move at all.
So I started to do some research on how to pay off debt fast. Just 5 months ago I decided to pay an extra $200 every two weeks toward the actual debt.
That’s in addition to the $86 minimum payment that is automatically deducted from my checking account. I also received a $800 bonus from my day job in December and I just used all of it toward my loan. It reduced it significantly. Now, my loan is about $2500.
I realized that if I only made the $86 minimum payment each month, I would pay more interest and it would take me longer to pay off my balance.
Make extra repayments on your debt
So first, make extra repayments on your debt. Why? Because the more money you owe, the more interest you will pay. If you miss a repayment, the interest on your loan will build up and you will end up paying interest on your interest.
By making extra repayment on your credit card debts or private school loan, car loan, or mortgage, you will pay off your debts faster and save on interest.
If you are dealing with credit card debts, make extra repayments on the credit card with the highest interest rate first, or tackle the smallest debt first.
Check to see if you are allowed to make extra payments on your loan and see if there is a fee to do so. Some loans do not allow you to do that. When you have a loan or credit card debt, you pay on both the principal and the interest. Anything extra you pay will cut your interest and reduce the life of your loan. So find out it there are any fees or penalties if you pay off your debt early.
Use Some of your bonus and tax refund toward your debt
If you receive a bonus this year or a tax refund, don’t be tempted to use spend it all. Use some or all of that extra money toward your debt. it will reduce the amount significantly and lower your interest rate.
Related topic: 10 Simple Ways to Use Your Bonus
In sum, making extra repayments in addition to the minimum monthly repayment can cut your debt by years and save you a lot of money.