Need to get out of a pile of loan debt? Here’s how you can pay it off quickly
Paying off debt quickly can help make room for other financial goals.
- Refinancing your loans could get you a better interest rate and a shorter repayment period.
- Two common repayment strategies are the debt avalanche and the debt snowball.
- If you can pay off your debts more frequently, you save on interest costs.
With credit available for everything from financing college to buying a new car to renovating your home, you may find yourself with a growing mountain of debt before you know it. Paying off these loans as quickly as possible will save you money in the long run and free up your money for other financial goals.
Most loans involve interest, the additional fee a borrower pays to use the lender's money. The faster you repay a loan, the less interest you have to pay.
5 Expert tips to pay off your loans fast
Reducing your loan balances faster than planned is possible and does not have to be that complicated at all. These five tips can help, says Gabe Krajicek, CEO of Kasasaein fintech company that provides financial products and marketing services to community banks and credit unions:
1. Tap into equity
Using assets you already have to repay your loan can help you repay your loan faster and eliminate the need to do things like take another job or cut your budget. "You can use your existing equity to pay off loans," Krajicek says. "This includes all non-liquid assets such as real estate and stocks."
2. Refinance your loans
By refinancing your loans, you can get a lower interest rate, which saves you interest on your loan. You may also be able to shorten your repayment period, which means your monthly payments will be higher, but you'll pay less interest overall.
3. Consolidate your credit debt
You may be able to consolidate multiple loans into one with a single monthly payment, making it easier to keep track of your loan balance. You may even be able to get a lower interest rate, although this is more common when refinancing loans.
Krajicek recommends reaching out to a local community bank or credit union. Depending on the type of loan, you can also refinance with an online lender or a major bank.
4. Pay more money more often
If you are financially able, you can quickly reduce the cost of your loan by making more payments than planned. Or you can make larger payments at the same rate at which you have already paid.
"The faster you pay off your loans, the more money you save in interest, but be careful not to sacrifice your safety net," Krajicek says. "Life's surprising expenses don't stop just because you're on a mission to pay off your debt."
5. Seek help
There are several ways to lower your payments, get assistance paying off your loans, or even have loans forgiven altogether. This can be done through government programs or local organizations. You can also ask family and friends for money to pay off your debt, then repay it at a lower interest rate or without interest.
Here's how to start reducing your loan balances
Additional payments can help you lower your credit faster. If you are able, part-time jobs could help you put extra money toward your loan debt. If your overall loan balance goes down, so will your interest payments. Set up automatic payment to make sure you don't miss any payments.
Two of the most popular strategies for paying off credit debt include the debt avalanche and the debt snowball.
If you have an avalanche of debt, pay off your loan with the highest interest rate first. Once your debt is paid off at the highest interest rate, you move to the next highest interest rate and so on. This way, you'll save more money over the course of the loan, says Forrest McCall, personal finance expert and owner of the financial blog, "Don't work another day."
With the debt snowball method, start by paying off your smallest debts first. You pay the most for the smallest debt and the least for the rest.
"After that initial debt is paid off, you put the full amount of your repayment on the next lower amount," Krajicek says. "And of course, limit accumulating more debt while you work to pay off current debt.
What happens if I skip loan payments, if it is allowed?
Unpaid interest during forbearance periods can increase your overall loan balance as interest continues to accrue on larger and larger amounts of money unless you actively repay the total amount owed.
Capitalized interest is unpaid interest that is added to your total loan amount after periods of non-payment, including forbearance, deferment, and after any grace period (grace periods usually apply to student loans). This increases your total loan balance, and you later pay interest on this higher amount, which increases the total cost of your loan.
Interest can be capitalized on any type of loan.
What happens if I only make the minimum loan payment?
Paying less than the recommended monthly amount can increase your overall loan balance. That's because when you pay the minimum amount, most of your money goes to interest and fees, not your total loan amount.
It may seem tempting to make the required minimum payments because you have more money in your pocket. But the interest can add up if you only pay the amount you're charged, McCall says.
"To avoid increasing your loan balances, be sure to make payments that exceed the minimum payments," McCall says. "Because minimum payments are primarily focused on interest – you need to make sure you're making larger payments or interest can continue to pile up."