How to Pay Back a Loan Quickly
No one likes being indebted to another person. Being in debt with a bank, however, is a special kind of torture. Interest charges sometimes exceed the actual loan amount – ouch. Aside from paying cash, the best way to mitigate interest charges is to pay off the loan as quickly as you can. While there are a number of sophisticated ways to do this, try to keep things as simple as possible.
Accelerate Payments
One of the best ways to pay off loans is to simply accelerate the payment schedule. If you’re on a tight budget, this can be tricky to pull off. Here’s how to temporarily free up some money:
- Raise insurance deductibles – Individual health insurance, auto insurance, and homeowner’s insurance all have deductibles that can be raised. A deductible is the amount of money you pay before the insurance company steps in to cover the costs of whatever is being insured. For example, a $200 deductible on collision coverage for an auto policy means that you must pay $200 to fix your car before the insurer will pay for any damages.
Raising your deductible to $500 or even $1,000 means you must pay more before the insurer steps in to help you. However, it also means your premium decreases – usually substantially. The extra savings can be used to accelerate loan payments.
- Borrow from cash value life insurance – It sounds crazy to take out a loan to pay off another loan, but cash value life insurance loans are different from other loan types. For starters, loans from life insurance policies don’t have to be repaid during your lifetime. If you borrow from your life insurance policy, any unpaid loans are deducted from the death benefit when you die.
Secondly, life insurance loans often come with preferred interest rates of 1 to 2 percent. In some cases, the net interest rate is zero because the insurer continues to pay interest on your borrowed funds that equals the loan interest rate they’re charging you.
- Refinance your home – Refinancing a home does take some work, and you might end up extending the loan term a bit. However, If you have a lot of smaller loans, and you refinance them all into your mortgage, the total amount of monthly payments might drop considerably.
For example, you may have several debts with monthly payments totalling $1,000. If you refinance the debt into your home mortgage, the interest rate will probably be lower (home mortgages tend to carry lower rates than other types of debt), and thus your payment will be lower. I recently discovered this method when searching for loans in Sioux Falls.
So, continuing the example, you may end up with a total monthly debt payment of just $700 or even $600. Use the difference to make additional payments to the principal.
Build a Better Budget
A good budget will go a long way towards helping you pay off your debts quickly. Most people don’t have a written budget – this is a huge mistake. The simple act of writing your budget down, and allocating funds towards your debts, usually solves most budgeting problems. It sounds almost too simple, but it really does work.
Don’t Use Credit Cards To Pay Off Debts
Using credit cards to pay off non-credit card debt is another big mistake people make. Even unsecured personal loans tend to carry a lower rate than a credit card. That’s because credit cards are considered a “revolving line of credit.” They’re not meant to carry balances for long periods of time. It’s a high-risk proposition for the credit card company – hence the high interest rate.
In most cases, transferring non-credit card loans to credit cards only delays the inevitable, costs you more (since the interest is higher), and may force you into a position where you have to default on your debts.
Adam Jenson is a personal finance expert. He loves to share his top tips for getting smarter loans on personal finance blogs.
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Category: Loans
