As of 2019, the amount of consumer debt in the United States totaled over $13 trillion from nearly 300 million people. A lot of Americans face extreme financial hardships, regardless of their age, education and income level due to overwhelming debt. Whether you’re buried under student loans, credit card fees or a mortgage you can’t afford, debt can land you in serious financial trouble.
Being in debt can be a slippery slope, which is why you should be doing everything in your power to pay off what you owe as quickly as possible. Most banks allow you to pay off a loan early, but it won’t be easy. There’s usually a minimum monthly amount you have to pay toward that debt, and the minimum won’t get your debt cleared quickly. If you want to be financially stable, it’s important to know how to pay off a debt early and when you should consider doing so.
When does it make sense to pay off debt early
Is it better to pay off a loan early, and can you pay off a loan early? The short answer is almost always yes. If you have the financial means to pay back a loan before it’s due, it’s usually a smart financial move to do so. However, there can in some cases be repercussions for paying off your debt early that you should be aware of.
Advantages of paying off debt early
The main advantage of paying off your debt quickly is that you’ll no longer have monthly payments to deal with. As a result, you can put that money into savings or an investment account.
You’ll also save a significant amount of money in interest that you would have paid over the life of the loan, which means you’ll have more money in your pocket. You can also expect your credit score to improve after paying off debt.
Disadvantages of paying off debt early
It’s usually a good idea to try and pay off your debt as soon as possible, but keep in mind that there are certain situations when it doesn’t make sense. If you receive a large sum of money and put it toward your debt, you won’t be able to invest it and earn interest on it. It might make more sense to put that money in an emergency fund or invest it in a high-interest savings account instead.
Some loans will have penalties for paying the loan off early, so it’s important to know whether your loan comes with hefty financial penalties before you pay it off. It may be wiser to put the money into an interest-bearing account instead and continue to make monthly payments toward your loan rather than pay for unnecessary early payoff penalties.
Carefully consider where the money is coming from before using it to pay off your debt. If the money is in savings for emergencies it may not be wise to deplete that fund, especially if it puts you in a position where you’ll be more likely to use a credit card and rack up new debt at a high-interest rate.
How to pay off debt early
If you’re considering paying off a loan early, there are a few ways to go about it. You don’t necessarily have to make one giant payment. It might be smarter to pay it off sooner with other methods, including:
Pay extra when you can
One of the most effective ways to pay off your debt before it’s due is to pay more than what you owe when you can. Start by paying more than the minimum amount each month, but only when you have the extra money to spare. Make sure you still have sufficient funds to cover rent, food, childcare, transportation and other daily expenses. Paying more than the minimum is the only way you’ll make a dent in your debt because it will offset the interest you’re accruing. For example, if the minimum amount is $150, pay $300 when you can instead while still maintaining the monthly minimum when funds are tight.
Try making an extra payment a year
If you have a bit of extra money, consider using it to make an extra payment toward your loan. For example, if you receive a work bonus in December, use that money to make two payments for the month to start chipping away at the principal you owe. Keep in mind that the more you owe and the longer the term of the loan, the more you’ll benefit from making an extra payment. Before you decide to make an extra payment, check with your bank or lender to make sure there aren’t any fees or penalties for doing so.
Make bi-weekly payments instead of monthly
Putting money toward your debt on a bi-weekly basis may make you more accountable than a monthly payment schedule will. This method isn’t the fastest way to pay off your loans but it’s manageable for most people and will help reduce the amount of interest you’re paying. If you switch to a bi-weekly payment plan you’ll have made the equivalent of one extra payment every year.
Look into lender payment programs
Some banks and loan providers offer special programs designed to help lendees pay off their debt more quickly. Keep in mind, though, that these programs can come with additional fees. Still, lender payment programs can be worth the hassle or extra money in some situations. You could also look into a debt management program through a credit counseling agency if you find yourself deep underwater.
The bottom line
If you’re struggling with mounting debt, it’s not too late to take action. Create a budget, live within your means and do your best to avoid taking on more debt. In most cases, it’s best to focus on paying off one debt at a time.
If you have student loans, mortgage and credit card debt, figure out which one has the highest interest and work on paying off that one first (hint: it’s likely your credit card). That can keep you from accumulating debt elsewhere or paying too much toward your debt and being unable to pay for necessary expenses like rent.
The first step to financial freedom is repaying your debts as soon as you can. Luckily, there are dozens of resources at your fingertips to help you take charge of your financial situation and live debt-free.
Source: Bankrate / Featured image by yanalya- freepik.com