How to Pay Off a Loan Faster and Cut Your Interest Payments
The amount you pay every month is based on the amount of money you borrow, your annual interest rate, and the length of time it takes you to pay off the loan. Generally, the lower your monthly payments are, the longer it takes to pay off a loan. If you are able to make extra payments toward the remaining balance on your home mortgage or auto loan, you may be able to pay off the debt faster.
If you are in a position to pay off a loan ahead of schedule, read the terms of your loan to see if you are even allowed to make extra payments without incurring fees. Some loans have special clauses that say you cannot do this unless pay a fee with the extra payments. Lenders institute these "pre-payment penalties" to deter borrowers from paying down loans quickly, since lenders make money off the interest. Use your judgement to see whether the fees are worth it.
If you are allowed to make extra payments without pre-payment penalties, do it like this: write one check for the normal amount you owe every month, and write a separate check for the principal. The principal is the amount of money you borrowed in the first place. The principal check can be any amount that you can reasonably afford. Make sure to write "principal" on the memo line, otherwise the payment may be partially applied to the interest. Allocating the money to the principal will directly reduce the amount of interest you owe.
Making extra payments earlier in your lending term will have a greater impact on reducing the length of time required to pay down the loan. This is because paying down the principal decreases the amount of interest you owe, thereby saving you money in the long run. During the first years of a home mortgage or auto loan, if you can afford to make extra principal payments without incurring fees, you should do so.
Refinancing at a lower interest rate can also help you pay off debts more quickly. If you get a lower interest rate, you will owe less in total interest, which will reduce the amount you owe.
If you are in a position to eliminate your debts, talk to you lenders about your options in paying down your home mortgage or auto loan.
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