With loans available for everything from paying for college to buying a new car or renovating your home, you can find yourself facing a growing pile of debt before you know it. Paying off those loans as quickly as possible saves you money in the long run and frees up your cash to put toward other financial goals.
Most loans come with interest, the additional charge a borrower pays to use the lender’s money. The faster you pay off a loan, the less in total interest you need to pay.
5 expert tips to pay off your loans fast
Reducing your loan balances more quickly than scheduled is possible, and it doesn’t have to be that complicated. These five tips can help you do it, says Gabe Krajicek, CEO of Kasasa, a fintech company that provides financial products and marketing services to community banks and credit unions:
1. Tap into equity
Using assets you already have to pay off your loan may help you both pay off your loan faster and negate the need to do things like pick up another job or cut down your budget. “You can use your existing equity to pay off loans,” Krajicek says. “This includes all non-liquid assets, such as real estate and stocks.”
2. Refinance your loans
Refinancing your loans can get you a lower interest rate, which will save you on interest on your loan. You may also be able to shorten your repayment term length, which will make your monthly payments higher but cost you less in overall interest.
3. Consolidate your loan debt
You may be able to consolidate multiple loans into one with a single monthly payment, which can make it easier to keep track of your loan balance. You may even be able to get a lower interest rate, although that’s more common with loan refinancing.
Krajicek recommends consulting with a local community bank or credit union. Depending on the the type of loan, you may also be able to refinance with an online lender or a large-scale bank.
4. Pay more money, more frequently
If you’re financially able, you can reduce the cost of your loan fast by making more payments than the ones scheduled. Or, you can make larger payments at the same cadence as you’ve already been paying.
“The faster you pay down your loans, the more money you will save in interest, but be careful not sacrifice your safety net,” Krajicek says. “Life’s surprise expenses don’t stop just because you are on a mission to pay off your debt.”
5. Seek help
There are several options to lower your payments, get assistance paying off your loans, or even get loans forgiven altogether. This could be through government programs or local organizations. You may also ask family and friends for money to help pay off your debt, and then pay them back at a lower interest rate or with no interest at all.
How to start reducing your loan balances
Making additional payments will help you lower your balance more quickly. If you’re able, side gigs might help you put extra cash toward your loan debt. As your total loan balance declines, your interest payments will as well. Set up autopay to make sure you don’t miss any payments.
Among the two most popular strategies to pay down loan debt are the debt avalanche and the debt snowball.
With a debt avalanche, you pay off your loan with the highest interest rate first. Once your highest interest rate debt is paid off, you move on to the next-highest interest rate, and so on down the line. By doing so, you’ll save more money over the course of the loan, says Forrest McCall, personal finance expert and owner of the finance blog, “Don’t Work Another Day.”
The debt snowball method has you start by paying down your smallest debt first. You will pay the most on the smallest debt and the minimum on the rest.
“After this initial debt is paid off, you put the full amount of what you were paying on this debt toward the next smallest amount,” Krajicek says. “And of course, limit accumulating more debt as you work to pay off current debt.
What happens if I skip loan payments when allowed?
Unpaid interest during periods of forbearance may increase your overall loan balance, as interest continues to accrue on larger and larger amounts of money when you aren’t actively paying down the total you owe.
Capitalized interest is unpaid interest added onto your total loan amount after periods of nonpayment, including forbearance, deferment, and after any grace period (grace periods are usually on student loans). This will increase your overall loan balance, and you’ll later pay interest on that higher amount, upping the total cost of your loan.
Interest can capitalize on any type of loan.
What happens if I only make the minimum loan payment?
Paying less than the recommended monthly amount may increase your overall loan balance. That’s because if you pay the minimum, most of your money will be going toward interest and fees, not your total loan amount.
Making the minimum required payments may seem appealing since you’ll have more money in your pocket. But interest can add up if you only pay the amount required of you, McCall says.
“To avoid increasing your loan balances, make sure to make payments greater than the minimum payments,” McCall says. “Because minimum payments are mainly geared toward interest — you need to ensure you are making payments larger than that otherwise the interest can continue to pile up.”