How to Pay Off Your Debt
Becoming debt-free can open up a lot of doors – you can finally free up cash to put toward your retirement savings or that European vacation you’ve always dreamed of (paid for in cash, of course). It’s no wonder that many of us want to learn how to pay off debt early so we can reach those goals faster.
Whatever your reason, becoming debt-free is within your reach. But before you start setting aside a bunch of money to pay it all off, here’s what you need to consider regarding how to pay off debt, including a few different ways to make the task more manageable.
Is it Bad to Pay Off Your Debt Early?
To be frank, it depends on your financial situation and your loan. Meaning, in many cases it’s a great idea, and other times it’s not.
The potential upside to paying off your debt early is that you can pay less interest throughout the lifetime of your loan and shorten the time it takes to pay it off. When you learn how long it’ll take to pay off your loan and decrease that timeline by a couple of months or years, it can serve as a motivator to better your financial situation.
But keep in mind that this can decrease your cash flow. Maybe you need to save more money for an emergency fund so that you’re not caught off guard in case of an unexpected expenses (think car or house repairs). Unlike Rocket Loans, some loans also penalize you for paying it off early by charging fees, so it might not make sense to do, especially since you’re probably not going to save much money.
Crunch some numbers before you decide either way. That way, you can figure out how much you can save (if at all) and whether you can even afford to pay it off early. Use tools like an amortization calculator for your mortgage or a fixed-rate calculator to see how much you can save if you were to increase your payments.
Which Debts Should You Pay Off First?
In most cases, paying off debts with the highest interest is probably your best bet. That way you can save more money on interest, especially if you make more than the minimum payments. It’s also crucial that you pay off debts that are in collections as those mean you’re at risk of losing some sort of asset, like your car.
Loans that tend to have the highest interest include payday loans and credit cards. Loans like federal student loans or your mortgage tends to have lower interest, meaning it’s OK to hold off paying them off early for now. Plus, you could qualify for federal student loan programs like loan forgiveness or income-based repayment plans, which can lower or eliminate part of your debt.
That said, some people find it more motivating to pay off their loans with the lowest balance first – paying that one off aggressively while making minimum paying on other debts. That way, you can feel more accomplished
Whatever, you decide, don’t neglect any of your loans, even if it’s just making minimum payments. Missing or being late on payments could negatively affect your credit score or put you in huge financial risk, such as losing your home.
How to Pay Off Debt Fast
If you decide it’s worth it to pay off your debt early, here are a few ways you can do so:
Consider Biweekly Payments
You can also pay off debt by paying every two weeks instead of every month. You’ll end up making the equivalent of one extra payment each year. When you pay off debt with a biweekly payment, you shouldn’t see a dramatic change to your monthly expenses. However, you’ll see dramatic savings as you pay off debt over the years because you're reducing the amount of interest.
Send Extra Money
Yup, it’s as easy as that. All you need to do is to make an extra payment – however much you wish – whenever you can. For those who find it hard to remain disciplined and find money here and there to shovel it towards their debt, you can consider sending small recurring payments towards them.
Don’t forget that if you do so, make sure you let your lender know that the extra payment is to go toward the principal of the loan. That way, your lender will contact you if you need to do things differently to make extra payments. Besides, making payments toward the principal means you’ll pay less in interest.
Getting a tax refund or work bonus this year? That check can come in hand for those early payments.
Round Up Loan Payments
Even though it’s small change, rounding up payments is a great start to paying more toward your debt. You don’t need a ton of extra cash and you probably won’t notice the amount, given it’s so small.
Next time you make your payment, just round it up to the next couple of dollars. For example, if you’re credit card payment is $112.23, add an extra $7.77 to make it $120. Within a year you’ll have paid an extra $93.24. Not too bad, right?
Ask For Discounts
Some lenders offer rate discounts if you sign up for autopay or online bill payments. Some even do so if you opt for paperless statements. It never hurts to ask and the best-case scenario is that you get a fraction of a percent off your interest rate – it can make a huge difference in how much you’ll save.
Consider Consolidating Your Loans
Debt consolidation is a great way to simplify your debt and save money at the same time. How it works is that you take out a debt consolidation personal loan to pay off your other high interest. You’re then left with one loan payment, ideally at a lower interest rate. With your savings, you can then pay off your debt faster without the need to make extra payments – although you could if you wanted to.
Plenty of places allow you to shop around for rates without affecting your credit score, so it’s worth taking a look. Think about how much stress-free you’ll feel when you finally make that last debt payment. The money you used to pay off debt can go toward other things that can vastly improve your quality of life.
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