Paying off a personal loan faster can be a great way to save money on interest and achieve financial freedom sooner. Here’s how you can get started.
If you’re struggling to manage your loan repayments or want to explore more options for paying off your loan early, seeking advice from a financial counsellor can be beneficial.
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National Debt Helpline: 1800 007 007
Financial Counselling Australia runs the national debt helpline as seen above. They can provide help and strategies based on how to manage debt if it’s getting stressful.
See Also: Personal Loan Repayment Calculator
1. Change to Fortnightly Payments
Instead of making monthly payments, consider switching to a fortnightly payment schedule. This method essentially adds a month’s worth of an extra repayment per year, as there are 26 fortnights in a year (or 13, 4-week blocks) as opposed to 12 months.
Over time, this can significantly reduce the length of your loan and the amount of interest you pay. However make sure your loan allows for this, and that there are zero or minimal fees for changing the repayment schedule.
2. Pay Extra When Possible
Rounding up your payments to the nearest hundred can help you pay off your loan faster without much effort. For example, if your monthly payment is $475, you could round it up to $500. The additional amount will directly reduce your principal, cutting down the interest and shortening your loan term.
Whenever you come into extra money, whether from a tax refund, bonus, or even a side gig, consider putting it towards your loan. Making extra payments directly to the principal can drastically reduce your debt and save you money in interest over time.
Again, make sure your lender allows for this with zero or minimal fees.
See Also: Extra Repayment Calculator
3. Refinance or Consolidate Your Debt
If your credit score has improved or interest rates have dropped since you took out your loan, refinancing could be a smart move if you’re on a variable rate. Refinancing to a lower interest rate can reduce your monthly payments and the total interest paid, helping you pay off your loan faster.
This may not always be possible, however, especially on short loan terms. You could also consider a debt consolidation loan if you have multiple loans giving you a headache.
4. Find a Lender With No Exit Fees
To make much of the above three points possible, you will want to minimise your costs when trying to get ahead on the loan. The fact is, many lenders want to keep you boxed in to paying the minimum per month to the schedule. Find one that allows you to get ahead.
Getting ahead could mean finding a lender that does not charge a discharge fee if you pay off the loan early. By paying extra or switching to fortnightly payments, you will likely end your loan term before the agreed period is up. Some lenders sting you for this, sometimes to the tune of a few hundred dollars, so it can be useful finding one that does not.
5. Prioritise High-Interest Loans
If you have multiple loans, focus on paying off the ones with the highest interest rates first. By doing so, you'll reduce the overall interest burden, freeing up more money to pay off other debts faster.
It’s also often the case that the smallest debts - such as payday loans or unsecured lending - carry the highest interest rates. By paying off smaller debts you might get a psychological boost and find motivation to pay off your larger debts.
6. Avoid Additional Debt
Taking on new debt while trying to pay off a loan can hinder your progress. Avoid opening new lines of credit or taking on new loans until your current personal loan is paid off. This will help you focus your financial resources on your existing debt.
This is the case for debt consolidation too. Debt consolidation is essentially another loan, and it can be tempting just to borrow more than you what you owe to other lenders. This could cause a debt spiral so tread carefully.
7. Create a Budget and Stick to It
Creating a realistic budget can help you identify areas where you can cut back and redirect those funds toward your loan payments. Sticking to a budget ensures you have a clear plan to manage your finances and pay off your loan faster.
This is one area where fixed-rate loans can be handy, as you know exactly what it will cost every month. On the other hand, fixed interest can be more restrictive with getting ahead on the loan.
8. Automate Your Payments
Automating your loan payments ensures you never miss a due date, which can save you from late fees and potential interest rate hikes.
Consider setting up direct debits or automated BPAY billing, as these could save a small amount of money compared to paying via debit card, which could attract fees.
Originally written by Jason Bryce in 2019.
Head photo by LyfeFuel on Unsplash
