5 strategies to pay off your loan faster

Yahoo

11 hours ago

If you took out a personal loan to cover a big expense or consolidate high-interest debt, you're not alone. Personal loan balances in the U.S. amount to $251 billion, according to TransUnion's most recent Credit Industry Analysis report, up from $167 billion three years prior.
Personal loans are a flexible tool to get your finances in order, but taking out a personal loan also means another monthly payment to manage. If you'd prefer to pay off your loan early to save on interest, here's what to know.
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Paying off a loan early has its benefits, and there are several strategies you can employ to accomplish this goal. But before doing so, read your loan paperwork carefully to ensure that your loan doesn't have any prepayment penalties. This can help you avoid any unpleasant surprises.
Whether you only kick in a few dollars or round up to the nearest hundred, paying a little extra on your monthly payments makes a big difference. Not only will you pay off your personal loan early, but you'll also reduce your interest costs over the life of the loan. You can also apply this strategy to other loans, such as your mortgage or credit cards.
For instance, if you borrowed a $10,000 personal loan with a five-year term and a 9.5% interest rate, paying $100 extra every month shortens your repayment period by 22 months and saves you more than $1,000 on interest.
If you've stumbled into a sudden inheritance or a big bonus at work, put some of that cash toward your personal loan. Just ensure you ask your lender to apply the payment directly to your loan principal, as some lenders don't automatically do this. By reducing the principal balance, the amount you owe in monthly interest costs will decrease too.
Before making a lump sum payment, make sure your windfall isn't better used paying down credit card debt or other high-interest debt.
Read more: Personal loan vs. credit card
Lenders sometimes let you split one monthly payment into two equal biweekly payments. While this doesn't seem like it would help you pay your loan off faster, paying every two weeks instead of once a month actually amounts to one full extra payment each year.
This could help you save significantly on interest, especially if you have a personal loan with a longer term. Ask your personal loan lender if biweekly payments are an option for you.
Read more: How to choose the right personal loan term length
When you're between a rock and a hard place, you take the interest rate you can get instead of the one you want. This often happens if you use a personal loan to cover an emergency expense, such as urgent home repairs.
Fortunately, you have some recourse if you have a loan with a high annual percentage rate (APR). If you've improved your credit score since taking out your personal loan, you might be able to refinance for a lower rate. Of course, this also depends on the current interest rate environment — refinancing doesn't make sense if rates are generally higher than when you borrowed initially.
Keep an eye on your credit score and credit report, and when the time seems right, compare refinance rates with multiple lenders. Even shaving a point or two off your rate can mean keeping hundreds of dollars in your pocket, as long as the refinancing fees don't eat up all your savings. Be sure to ask prospective lenders about their fees before moving forward with a personal loan refinance.
Read more: What credit score do you need for a personal loan?
If you have multiple personal loans or are carrying high-interest credit card balances, consider consolidating those debts with a single personal loan. Debt consolidation can streamline your monthly payments, and it could also reduce your interest rates — especially if you have credit card debt.
Borrowers often use personal loans to consolidate debt, but as with refinancing options, you'll want to make sure your new loan doesn't have an origination fee or other fees that would erode any potential savings. Ask your lender before moving forward.
Read more: How to consolidate credit card debt with a personal loan
As a general guideline, paying off your personal loan early will save money because, even though the principal or the original loan amount stays the same, you'll pay less interest.
However, you'll want to factor in considerations like prepayment fees and other types of high-interest debt you currently have to decide if paying off your personal loan early is the right financial decision for you.
To lower your monthly payment, you could secure a lower interest rate by refinancing the debt or extending your repayment period by consolidating into a new loan. However, if refinancing isn't an option and you're struggling to make payments, contact your lender and see if they can adjust your personal loan terms or temporarily defer your payments.
Most personal loans are unsecured, which means you probably didn't have to put up collateral to get it. So while you won't lose any assets if you stop making monthly payments, the entire balance of the loan, including late fees, can go into default and drastically hurt your credit score. If you do have a secured personal loan, the lender can seize your assets if you fail to make loan payments.
Read more: What happens if you default on a personal loan?
Paying off debt affects financial metrics like your credit utilization, debt-to-income ratio, and credit mix, all of which determine your credit score. While early loan repayment is ultimately a big positive, you might see a temporary dip in your credit score. But don't worry — it typically rebounds within a few months.