Getting a loan takes a lot of courage. Whether it’s a personal loan or a business loan, it’s a big commitment and it includes huge responsibilities. If you take out a loan responsibly, it can give you numerous financial advantages as it can be used to get a new car or home or business improvements.
Borrowers are aware of the importance of saving money and paying loans on time. It’s always a good idea to look for tips for paying loans off sooner. And if your financial status is currently stable, you might consider paying your loans off sooner.
Is it worth paying your loans sooner?
Paying your loans off sooner will help you out of debts earlier and take some financial loads off your shoulder. Sounds good right?
If you’re deciding whether to clear off your loans or not, check below for some of the benefits of paying your loans sooner.
- Save money on interest
This is the biggest advantage of speeding up loan payoffs. The most common reason for wanting to pay off your loan sooner is to lessen the total cost. The amount you pay in advance will be less in any additional interest. So, you basically save money on interest. The sooner you can pay your loan, the lower the cost of your interest.
As Tarpley (2021) said in her article for Business Insider, for each payment you make for your loan, a part of it will go towards interest. The more payments you make, the less you pay in interest long term. This will lead to lowering your loan term and even make you save money. - Improve Financial Strength
With your loans already paid, you can now save the money that you once used for repayments. This adds to the stability of your financial status. You can use the extra money for your other financial goals like getting another property, a business or investing.
Paying your loans off sooner also has a positive effect on your debt-to-income ratio which refers to your total debts and liabilities divided by your gross income (before tax income) per year. This ratio determines that despite your full debts, you can manage to meet your loan repayments now and in the future. When you have a good debt-to-income ratio, getting your next loan approved will be highly favourable.
Another thing is you also improve your credit scores when you pay off your loans sooner. Credit scores consider the amount you’re currently borrowing. So, maxing out your borrowing capacity will decrease your score. - Peace of mind
This even goes without saying. Being free of debts is a great motivator when you’re working on your personal and financial goals. Paying your loans off sooner is a milestone to celebrate. It also reduces your stress when you think of your finances. Just be sure that making the early payment doesn’t put your future financial status in chaos. Make the extra payments within your means.
It’s nice to jump on the opportunity of clearing off your loans. However, before you decide to pay your loans off, there are a few things you need to think about first. Depending on your personal and financial goals, think of how you want to use the extra money you have.
Top Tips for Paying Loans Off Sooner
Have you assessed your financial status and decided you want to pay off loans sooner? Yes? That’s great to hear! A small change in the way you pay your loans can surely make a big difference in the future.
Check out some of our tips to help you pay your loans sooner.
- Know how much you still owe
The best way to start is to understand and know your current balance. Get hold of your lender and discuss your situation and what you want to achieve. - Make more frequent repayments
One simple tip to get you off the hook of loans is to increase your payments. You can do this by switching to fortnightly or weekly payments instead of monthly.
There are 26 fortnights in a year, so it’s like making an extra month’s payment without you even realizing it. Doing this will lessen your principal and interest amount and will also reduce your loan term. - Make extra repayments
If you can make extra or lump sum repayments on top of your regular minimum repayments, then do so. Extra repayments will go to your principal rather than the loan interest. And the less principal you have, the less interest you’re being charged.
If you received any bonus or incentive cash, consider making them as additional repayment to your loan. But again, before making any extra repayments, check with your lender first. Making extra repayments doesn’t apply if you’re under a fixed-term loan. Double-check your loan.
- Add an off-set account
Check lenders that offer an offset account that you can link to your loan. The funds in your offset account are then “offset” to your loan. This means your interest will be based on the difference between your loan balance and your offset account.
This works best for borrowers who want to make extra repayments but don’t want all their money to go directly to pay their loan. - Consolidate your loans
In case you have multiple loans and the interest rates increase, you’ll see all your loans being affected by the increase. This can be overwhelming. Consider consolidating or refinancing all your loans into one repayment to help you in staying on top of your debt.
These tips for paying loans off sooner are simple yet effective strategies. However, it’s important to talk first to your finance broker and financial advisor before making your move. Make sure that your extra payments will go to the principal and not on the interest.
You need to also know and fully understand the process of how to pay off your loan early. Ask if there are pre-payment fees and required steps to get things done properly.
DDDC Finance is here to help you in making the best choice that will suit your needs and financial status. Let’s work together in making your financial goals a success.
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Sources:
[1] Pritchard, J. (2022, February 8). Why Pay Off Loans Early?. The Balance.
[2] Tarpley, L. (2021, November 9). Paying off your mortgage early helps you save money in the long run, but it isn’t for everyone. Business Insider.
[3] Lending Club. (n.d). The Pros and Cons of Paying Off a Personal Loan Early.
[4] Sweeney, N. (2021, October 26). 10 ways to get the mortgage monkey off your back faster. Your Mortgage.
[5] Duffy, E. (2021, February 2). How to pay off your personal loan faster. Savings.