Monthly loan payments are typically one of the larger expenses on a monthly budget. Not paying them on time can affect the borrower’s credit score and ability to get approved for new credit in the future. To ensure that doesn’t happen, use a loan payment calculator before signing the loan agreement, then check the budget to make sure you can afford it.
Consumers who follow the advice above often find themselves in a position where they can pay their loan off early. There are several ways to do this. Before acting on one of them, review your motives for early repayment and check to see if the lender will charge a fee for you to do that. If everything checks out, here are your options for early repayment:
Lenders usually ask for monthly installment payments. One way to pay the loan off early is to make an extra payment at the midway point between those installments. In other words, pay bi-weekly instead of monthly. The additional payment doesn’t need to be the same as the regular payment. Adding an extra $100 every month will resolve that loan quickly.
Rounding up your monthly payment
If the monthly installment payment is $275, round it up to $300. The difference in the monthly budget will barely be noticed, adding up to an extra $300 a year. That’s like adding a thirteenth payment to the loan agreement. On a five-year loan, it gets paid off almost half a year earlier. Rounding also lowers the total interest a borrower needs to pay.
A “balloon payment” once a year
Balloon payments are the same concept as the strategies listed above, but the extra payment comes in one lump sum annually instead of breaking it up over several months. Many consumers do this when they get their tax return or receive a quarterly or annual bonus from their employer. Applying that extra money to debt saves on total interest payments.
Refinance the original loan
Most consumers think of refinancing as a way to stretch out a loan over a longer period, lowering the amount of monthly installment payments. Refinancing can also shorten the loan term, increasing the monthly payment in exchange for a lower interest rate and getting the loan paid off early. Check with your lender to see if this is an option.
Get a second job or side hustle
Early repayment is more realistic when your monthly income is higher. Look for a second job or pick up a side hustle you can make money with. Examples of this are dog walking, babysitting, and freelance writing. Since the pandemic, the number of online side hustles has increased. Many people have left their jobs and turned their side hustle into a full-time business.
The Bottom Line
Early repayment of loans and other debt frees up extra money for savings and investing. It could also give you the funds you need to take that long-overdue vacation. Review your options. You could try bi-weekly payments, an extra monthly payment, an annual balloon payment, refinancing, or starting a side hustle to make more money.