Taking out debt can be the best or worst financial decision you ever make. It all depends on how you manage it. Since the start of the pandemic, Canadian households have been carrying as much as $2.5 trillion in debt combined, so it’s a familiar struggle. One of the best things you can do for your money management is to pay off your debt as soon as possible. Luckily, it’s more achievable than you may think. Let’s talk about how to get out of debt and pay off loans faster than you planned!
Saving Money
Paying off loans early can, directly and indirectly, save you money. Directly, you will have to pay less interest if you make fewer payments and avoid potential late fees.
Indirectly, you can see a boost in your credit score over time by limiting your debt. Over time, this will lead to lower rates, the ability to refinance your mortgage, and more. Even a 1% difference could translate to big savings in the context of a $300,000 mortgage interest.
Boosting Credit
Paying off your loans early will show that you can handle your credit. Ending a loan early may have a short-term negative impact on your credit score, but that’s only if you’re closing accounts. Either way, it will help you in the long run.
For paying off revolving lines of credit like credit cards, you can keep them open and in good standing after paying them off. This will have immediate benefits to your credit score, and they can last for years!
Peace of Mind
Regardless of the causes of debt, debt is stressful. The more debt you have hanging over your head, the harder it is to achieve financial mobility. If you have to take out another line of debt for an unexpected emergency, it could destroy your monthly budget.
Eliminating debts leads to greater financial freedom, which leads to better peace of mind. Eliminating debt will help you save money for retirement, starting a business, buying a home, or whatever your future goals are!
How to Pay Off Loans Early
Make a plan to pay off your plans as early as possible. If you don’t have the money to pay it all off at once, that’s perfectly fine. The sooner you can, the better, but there’s no designated time period.
If you want to pay off your 5-year loan in 3 years, but it winds up being 4 years, that’s still an extra year without a loan hanging over your head. Always have a “reach” goal and a minimum goal in mind. This way, you’ll know the ideal payments to make every month, but if you find yourself in a tight financial position, you can make your minimum payment guilt-free.
Alternatively, you could simply pay every 2-3 weeks instead of monthly. If you want to cut your loan term in half, try making payments every 2 weeks and every 3 weeks to cut 25% off of your loan term.
Finally, another option would be to make large payments after saving. For example, if you have a 4-year loan at $250 a month, you dropping an extra $1,000 into your loan every year will remove a full year of payments.
Any of these strategies will work, so you will just have to choose what’s right for you! Regardless of your choice, it will require some planning and money management, but it’s worth it in the long run.
How to Calculate Your Payments
This is for those wishing to make bigger payments each month, which is the most popular option. Take a look at the remaining balance on your loan and divide it by the number of months left on your desired term.
Let’s say you’ve had a 5-year loan open for 14 months, and you’ve made the minimum payment of $300 every month. That means you have paid $4,200 on an $18,000, meaning your balance is now $13,800. If you want to finish that loan in 2 years and 10 months (an even 4 years total), then you would need to make monthly payments of $405.
If you want to finish those payments in 2 years, then your payments will be $575. Check your balance through your lender and make a new payment plan for yourself. Use a loan payment calculator to make it even easier!
Should You Always Pay Off Loans Early?
In most cases, paying off a loan early is a good idea for money management. However, if you have other priorities, then it may make sense to tend to those. For example, if you don’t have any savings for emergencies, you should start building a security fund for yourself.
However, in most cases, paying off debt makes more financial sense than saving money. Accumulating money in a savings account may yield 2% interest for you, but paying down debts with 5% to 25% interest will save you a lot more.
Also, in some cases, it may make sense to pay off your high-interest loans with an installment loan. This way, you can receive a better interest rate, try to pay it off early, boost your credit score, and limit the interest you owe by as much as possible. That’s something to consider for your financial health.
Live Financially Free
Now that you know the benefits and how to pay off loans as early as possible, remember that these tips won’t help you unless you put them to use! Taking control of your debts and paying them off as soon as you can is the best way to take control of your financial life.
Stay up to date with our latest financial tips, and don’t hesitate to contact us with any questions or for help with your finances.
