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- Consider paying extra when possible, making bi-weekly payments or looking into lender payment programs based on your budget.
- Paying off debt early comes with benefits, like freedom from monthly payments, saving money on interest and improving your credit score.
- Potential disadvantages to paying off debt early include having less liquidity for investing and possible prepayment penalties.
Paying off debt can be daunting, especially if you have a lot of it. Many people may be tempted to only make the minimum monthly payments to avoid putting too much thought toward it. However, there are many benefits to paying off debt early that should not be overlooked.
Before you start throwing all your extra cash at your debt, it’s important to understand the potential downsides and consider different strategies for early repayment.
How to pay off debt early
If you’re considering paying off debt early, there are a few ways to go about it. You don’t necessarily have to make one giant payment. It might be smarter to pay it off using other methods.
Pay extra when you can
Start by paying more than the minimum amount due each month, but only when you have the extra money to spare. It’s not recommended that you pull from savings to make these extra payments, as doing so can put you in a precarious financial position later.
Paying more than the minimum on credit card balances is the only way you’ll make a noticeable dent in your debt. Doing so will reduce the interest you’re accruing from month to month.
Make bi-weekly payments instead of monthly
This method isn’t the fastest way to pay off your loans, but it’s manageable for most people and will help reduce the amount of interest you pay. If you switch to a bi-weekly payment plan, you’ll have made the equivalent of one extra payment every year.
Look into lender payment programs
Some banks and loan providers offer special programs designed to help borrowers pay off their debt more quickly. Before you look into whether your lender offers it, know that these programs can come with additional fees. Be sure that any potential interest savings aren’t offset by the cost of the program.
4 advantages of paying off debt early
There are several advantages to paying off your debt early, and almost all of them translate into more money in your pocket each month and more financial freedom to address other goals.
Freedom from monthly payments
The more bills you have to pay, the more complicated and expensive your financial life can get. As you satisfy each of your debts, you’ll have fewer obligations to meet every month. Bills will become easier to pay, and you won’t have to spend as much time each month reviewing various accounts.
Save money on interest
When you have high-interest debt, such as credit cards or personal loans, it costs quite a bit just to make minimum monthly payments. In addition, each month you carry a balance on the account, your previous purchases may become more expensive, depending on how interest is calculated. By paying off the debt early, you’ll likely save what interest you would otherwise pay.
Consider the savings
Improve your credit score
Paying off debt decreases your credit utilization ratio, which is the amount of debt you owe relative to your overall available credit. Reducing your utilization ratio typically improves your credit score. As a result, you will likely have access to more favorable interest rates in the future.
Build your savings
One of the most significant advantages of paying off debt is the spare cash you will now have available to address other financial goals and priorities. Ideally, you will use some of the money to increase your savings account, which can help you avoid falling into debt again.
Disadvantages of paying off debt early
It’s usually a good idea to try and pay off your debt as soon as possible, but there are certain situations when it doesn’t make sense.
Less liquidity for investing
If you receive a large sum of money and put it toward your debt, you won’t be able to earn interest on it. It might make more sense to invest that money in an emergency fund, retirement account or a high-interest savings account instead.
Possible prepayment penalties
Some loans have penalties for early repayment. Know whether your loan comes with this type of hefty financial penalty before making extra payments. It may be wiser to put the money into a high-interest savings account instead and continue to make monthly payments toward your loan rather than pay these unnecessary penalties.
Debt can be a major burden on individuals. By paying off debt early, you can experience the freedom of fewer monthly payments, save money on interest, improve your credit score and increase your savings.
Carefully consider your options and potential penalties before paying off debt early. With determination and the right resources, you can achieve financial freedom and live a debt-free life.