5 tips to pay off personal loans sooner

Repay personal loans early
Advantages The inconvenients
Saves money on interest Check prepayment penalties
Release money sooner than expected Credit could be affected
Lower DTI May not have the money to make an additional payment, putting pressure on your budget

Although prepaying a personal loan has many advantages, be fully aware of the disadvantages before making a decision. Depending on your credit history and current credit mix, prepaying a loan could hurt your credit.

Your credit composition is a factor when determining your credit score and refers to the types of credit accounts you have. You need to have multiple types of credit to have a healthy credit mix. If you don’t have many other credit products, it might be worth completing your personal loan repayments as scheduled to boost your credit.

If you decide that prepaying your loan is the best option, here are five key steps you should take:

1. Break down the payments

As long as your lender doesn’t charge any prepayment penalties, you can split your monthly payment into two installments every two weeks. It’s the easiest way to reduce your debt faster.

By breaking down your payments this way, you’ll make one extra payment per year, speeding up the payment process. This method allows you to reduce the total interest paid and shorten the overall life of the loan by splitting your monthly payment into two installments and paying a little more on each.

For instance:

If your minimum monthly loan payment is $400, you could make payments of $225 each month and pay an additional $50 per month for your principal balance. This allows you to stay ahead of the game and pay off your loan sooner while still enjoying the benefits of credit by making regular payments.

Breaking down your loan payments into smaller bi-weekly payments might be a good option if you receive paychecks every two weeks and want to reduce your debt faster without depleting your funds. However, talk to your lender before making this change, as some lenders may have stricter repayment plans or may impose prepayment penalties.

2. Make extra payments when you can

If you don’t have enough extra income to make higher payments each month, you can always make extra payments from time to time to reduce your debt.

Consider using extra income from vacations, birthdays, bonuses, and other extra savings throughout the year. It can even be as simple as not eating out once a month so that you have some extra money in the budget for your loan repayment. This method is simply to slightly change your habits to make room in your budget for additional loan payments.

Organizing your budget and saving as much as possible is always a good idea, especially if you want to pay off a loan early. However, you do not have to repay your loan early if your budget is tight. As long as you’re making monthly minimum payments on your loan, you’re in good shape. However, finding space in your budget for an extra loan payment from time to time will help you pay off your loan faster and reduce interest.

3. Consider adding a secondary income stream

If you have the time, finding extra income could be a good way to save up to pay off your loan early. Getting a side job does not necessarily mean getting a second job. There are several ways to earn some extra cash. You can try babysitting, pet sitting, tutoring, food and grocery delivery, opening an Etsy store, driving for Uber, and countless other endeavours.

Having a side hustle has become increasingly popular, with 40% of Millennials saying their side hustle accounts for at least half of their income. However, a Bankrate survey found that 41% of people with a side hustle do so to cover day-to-day expenses. Only 17% of people with secondary activities use this additional income to save, and only 12% use the funds to pay off their debts.

If you’re considering starting a side business to pay off your debt, be sure to allocate funds for day-to-day expenses and savings before you worry about paying off your debt.

4. Review your budget

Establishing and maintaining a monthly budget is a great way to organize your finances and see where you have opportunities to save. However, it can be difficult to maintain a budget, especially since inflation continues to be high and many are struggling to make ends meet. Only 32% of US households prepare monthly budgets.

Making a monthly budget allows you to track your spending habits and determine where you could cut back and save. For example, a recent survey found that 42% of respondents paid for subscription services they no longer use. If you’re looking to allocate more funds to pay off your loans, reorganizing your budget and looking for places to make cuts could be a great way to do that.

If you’re new to budgeting, Bankrate has resources to help you get started. It might also be worth talking to a financial adviser if your situation is more complicated or you need more specialist advice.

5. Consider refinancing your personal loan

Another way to potentially shorten the life of your loan is to refinance. You can refinance a single loan or you can combine several loans into one with a debt consolidation loan.

Refinancing allows you to transfer your current debt to a new loan with a lower interest rate or a different repayment plan. Refinancing your loan can reduce monthly payments and get you out of debt faster.

However, refinancing a loan is not suitable for all circumstances. You should only refinance your loan if you can get a lower interest rate on the new loan or if you need to extend your repayment term. If your credit score has increased recently and you think you might qualify for lower interest rates with the new score, refinancing could help you get that lower rate.

Refinancing your loan and getting a lower interest rate will lower your monthly payments, allowing you to pay off the loan faster. It also gives you the option of choosing a shorter repayment period, which will shorten the overall life of your loan.

However, review your lender’s terms before deciding to refinance. If you are almost done paying off your loan, or if the interest rate on a refinanced loan would be higher, this process is probably not worth it. Pay attention to the fees you would have to pay.

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About Judith J. George

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