A loan repayment strategy makes good financial sense, since carrying debt costs you money. Even loans with low interest rates can be costly over long periods, since you pay interest throughout your loan.
Interest becomes a lot of wasted money, especially when you carry multiple loans. That money could be put to better use for things such as an emergency fund, savings for your future, or investments to create a long-term legacy.
Luckily, if you’re reading this article loan repayment options are already on your mind. That’s a good sign and the first step to eliminating your debt quicker than just through your standard loan repayment schedule.
Loan Repayment Strategies
There’s no one-size-fits-all solution when you decide to create a loan repayment strategy. It’s all about you and your priorities. Considerations include the types of loans you carry, other types of debt you owe, your financial goals, and your financial needs to live a comfortable life.
Whether you choose to do any of the following things is totally up to you. Nonetheless, they provide a good starting point for your customized loan repayment plan.
Identify Your Debts
Before you can pay off debts, you need to know precisely what you owe. Luckily, you can easily find this information through your online accounts with the lenders.
List all your existing outstanding debts by company, outstanding amount, interest rate, and minimum monthly required payment. A debt pay off app offers ease and benefits such as automation and tracking.
Yes, this takes time and effort. However, you can’t plan your future unless you take a realistic look at where you stand now.
Create a Budget
The word budget has unnecessarily taken on a negative connotation. Taking control of your money doesn’t mean you’ll suffer. A budget is just an estimate of what you earn and spend within a set period of time. It isn’t set in stone, but it can be a useful tool to keep you on track towards your loan repayment goals.
So, how do you create a budget? Once again, the simplest way is to use technology. Budgeting apps make it simple to tally up your monthly income and expenses.
The best apps allow you to categorize expenses into relevant accounts such as mandatory and discretionary amounts. In other words, they make it simple to see how much money beyond necessities you can put towards your loan repayment plan. Any excess income can be used to pay down your loans.
Debt Consolidation
If you have several loans, you may want to consider consolidating them into a single one. However, debt consolidation is only worthwhile if you can get a new loan with a lower interest rate and it is fee-free. You don’t want to pay an origination fee or prepayment penalty.
The cost of unnecessary fees and the penalty for paying early voids the benefit of taking out a new loan. You certainly don’t want to pay more interest either as that would defeat the purpose of debt consolidation.
Fortunately, a good debt consolidation loan leads to one payment instead of several. This simplifies your finances and your life. It also makes it much easier to focus your efforts on the one debt so your can pay it off as quickly as possible.
If you wish, you can also shorten the loan term so that you pay off your loan quicker. That way you don’t need to worry about making extra payments. It’s already factored into the calculations. However, it is very important that the larger loan and shorter term don’t strain your finances too much. Always leave room for unexpected expenses.
If you decide consolidation is not for you, we also offer loan repayment strategies to pay off your loans one at a time later on. Whichever way you decide to go, everything starts with a budget. You need to know how much income you can put towards loan repayment.
Repaying Loans One at a Time
If you decide you don’t want to bother with debt consolidation, you can still create a solid loan repayment plan. The two most common approaches to do so are called the avalanche and snowball methods. They both accelerate repayment, but in different ways.
Nonetheless, they both require commitment, consistency, and a steady amount of income you can dedicate towards loan repayment.
Prepayment Penalty Considerations
Before you decide on a method, always check whether your current loans involve prepayment penalties. These are fees many lenders levy to compensate them for the interest they would have earned if you repaid your loan using your normal repayment schedule.
Luckily, some lenders don’t charge prepayment penalties. Nonetheless, most lenders want a heads up beforehand before you start making extra payments. Otherwise, they might apply the money towards your next payment, instead of the principal of the loan.
Regrettably, many lenders do charge prepayment penalties. If you’re stuck with a loan that has a prepayment penalty, it may not make sense to make extra payments. Prepayment penalties can be calculated as a percentage of your loan amount or a set fee. That can add up to a lot of money.
Check your loan documents or contact your lender before you settle on a loan repayment strategy. Sometimes sticking to your regular repayment schedule is the wisest way to go.
Avalanche Method
The debt avalanche method prioritizes your loan with the highest interest rate. The intention is to save you the most money in interest.
If you have multiple outstanding loans, you always focus on the one with the highest interest rate, even if it has a lower balance. Once you pay that one off, you move on to the next one.
Targeting the highest interest rate debt often reduces the time it takes to pay off your loan by at least a few months. Sometimes this approach seems wrong, due to what you’ve heard elsewhere. Examples include paying off other debts before a ‘low-interest’ student loan.
In the example below, you can see the personal loan and auto loans actually have lower interest rates. The student loan might have been low interest at one time, but the lending market changed.
In this case, you would tackle your student loan first. Once you’ve paid that off, you’d focus on the auto loan and finally the personal loan.
Existing Debts
$ 8,000 personal loan at 6.25%
$11,000 auto loan at 7.25% interest rate
$15,000 student loan at 9.08% interest rate
Snowball Method
The snowball takes a different approach, by tackling your debts with the smallest balances first. The greatest advantage of this method is that it can create momentum.
As you eliminate each debt it fuels your efforts. Consequently, it is one of the most popular loan repayment options. However, this method does not reduce the amount you pay in interest.
Using the same example above and the snowball method you would focus on your personal loan first, then your auto loan, and finally your student loan.
Ways to Make Loan Repayment Easier
While you will need to be committed and as consistent as possible if you want to successfully repay loans, there may be times when you need to adjust your priorities. That’s fine, just come back to your goal of loan repayment as soon as possible.
As mentioned, consolidating debt into a new loan is sometimes a good solution, especially at a lower interest rate and with a shorter term. Just be certain you can afford it. If you can’t shorten the term, you can still make lump sum payments on your consolidated loan.
Besides consolidation, the following suggestions can help you stick to your loan repayment plan.
Pay Automatically
Make an additional payment at any time during the month. Some people choose their loan’s due date, while other align the payment with a pay day. One of the best ways to make sure this happens is through automatic payments.
Most financial institutions have the capacity to withdraw payments from your account to send to your lender. You just need to arrange it with your lender beforehand to ensure your payments go towards the principal. Of course, you also have to get the money into the account on time.
Make Two Small Bi-Weekly Payments
Paying a smaller amount every two weeks is easier to handle and it can also shave interest charges off your loan quicker. Align payments with your payday so that you don’t miss the money.
Throw ‘Extra’ Money at Your Loans
Anytime you earn ‘extra’ money you should put it towards loan repayment. This could be anything from an increase due to a raise at work to a gift from a relative or money you won on a lottery ticket. Other sources of additional money include side gigs, selling goods, or even a second job.
Tap Into FlexMoney’s Lender Network
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Installment loan repayment can happen quickly once you’re approved. Complete your application form today and tap into the best alternative lending platform in the U.S. You may be able to borrow between $200 and $35,000, depending on your situation.