Debt has become a part of our life now. Everyone with even little debt has to manage their debt to make sure that it doesn’t get out of control. If you have borrowed before or you are a borrower currently, you know very well that living with debt can be an expensive and stressful experience therefore, it is important to keep track of your loans now and then to ensure all terms and conditions are the same and repayments are in order. In one of my past articles, I shared some tips on how to manage your debts: by listing all your debts including the name of the debtor(s), due date(s), amount of the debt(s), and repayment schedule of the debt(s) so you can decide which debt to pay off first, and also by paying your debt payments on time.
Just managing your debt is not enough if you want to be financially independent, but paying off your debt faster will make you financially independent. So why should you pay off your debt(s) faster than required? It might not seem important right now but paying off debts will strengthen your financial position by saving money that would’ve gone to pay your monthly instalments and interests charged on your debt(s).
Moreover, we know that happiness does not have a price and it has been proved by many prominent psychologists that paying off your debt can reduce stress which leads to living a happy life. Now that you know why you should pay off your debt(s) as soon as possible, you might be wondering how can you do that. In this article, I will share tips on how to pay off your debts/loans faster;
- Make Bi-Weekly Payments — Loans are traditionally set up for monthly repayment. By submitting your loan payments twice in a month (bi-weekly) instead of once per month you will accomplish one major thing; you will accumulate less interest because the payments will be applied more to your principal during the tenure of the loan hence reducing the debt amount. The important thing is to make sure that you discuss this with your lender before you start making bi-weekly payments because some lenders might penalize you for any extra payments or pay off your loan earlier than originally scheduled. Also, keep in mind that you may not notice the impact in your budget sooner, but you will notice the positive impact on your loan so doesn’t get discouraged.
- Make Extra Payments Whenever You Can — Another way to pay off your loan faster if you don’t have the cash flow to commit to bi-weekly payments is by making one extra payment whenever you can. Anytime when you have extra money unexpectedly, why not divert those extra funds into your loan payments? This could be driven by an annual bonus payment or additional income from a second source. You can channel that extra funds towards paying down your loan to reduce the size and tenure of your loan. It is worth noting that sometimes making one-off payments will not save you any money, as the full amount of interest may still be applied though you will achieve paying off your loan quicker. Multiple payments are even more effective at reducing your overall loan costs.
- Refinance Your Loan — There are plenty of reasons when refinancing a loan would be a smart move. You can refinance your loan by either getting a better deal from your current lender or switching your loan to a new lender. This is one of the effective ways to lower your payment and save interest hence paying off your loan faster. This process involves taking out a new loan and using the new proceeds to pay off your old loan. Before choosing this option, make sure that you get the best deal by shopping around to find the best lender to refinance your old loan. Remember to compare loan rates, loan lengths, and any applicable fees to ensure it is beneficial and affordable to you. You can refinance your loan to reduce your loan tenure hence reducing your monthly repayments which will result in paying your debt faster.
In summary, why should you pay off my debt faster than is required? Simple; Paying off your debt will put you in a strong financial position since the money that you have been paying towards your debt becomes available for you to use for other activities. Debts are good if used wisely so I recommend you look at all the options carefully before taking any debt to ensure you don’t spend more than you need to on interest or take longer to pay off your debt than you perhaps need to. Furthermore, before deciding to pay off a loan, always remember to make sure you have enough money saved for emergencies. Three to six months of your monthly expenses should be ideal as your emergency fund. This would cover you and help you float in the event of losing your job or becoming ill or any number of other emergencies. Lastly, no matter what type of debt you have, it’s important to know that there is always a way to pay off your debt. The tips that I shared for the last two weeks will help you pay off your debt faster and put you on a path of becoming financially independent.
Written by Kelvin Mkwawa, MBA
Email address: Kelvin.firstname.lastname@example.org
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