Loans are a great way to access the things you can’t put off until you have the money to do – like getting an education, buying a car, or starting a business. Even a quick payday loan is helpful when you’re in a jam to pay your rent. But, the thing about loans is you have to know how to pay them back and how to tell good debt from bad debt.
If you’re having trouble figuring out how to pay off a loan that you’ve already used and need to start paying back, use the tips listed below.
1. Assess How Much You Owe
Before you start crunching numbers in your bank account, take a look at how big your loan really is. You may not have noticed how all those student loans you took out added up or read all the facts about fast loans you took out a few months ago.
Go over everything that is asked of you. Double-check what your monthly payments are and take a look at the estimated amount of time it will take to pay off the loan at the expected minimum payment and frequency. Pay close attention to the interest rate, too.
2. Pay Attention to the Interest Rate
Interest on a loan accumulates over time. In other words, the longer you take to figure out how to pay back loans, the more money you’ll end up paying than if you took care of it sooner.
This is because interest is still being applied to the remaining amount. To pay less on interest, take care of the loans with the highest interest rates first. Then, focus on loans of lesser amounts/lower interest.
3. Set Your Budget
No matter how many loans your total amount due is broken into, you need a budget to help you cover all of your expenses. This includes living costs, miscellaneous expenses, and of course, loan payments.
Your budget should be enough for rent, groceries, transportation, and scheduled payments. In an ideal world, you should have some money left over for savings and emergency costs, and a little bit of personal money for fun things is helpful, too. This last part of your budget lets you have a bit of financial freedom while working to pay off your loan.
4. Pay More Than the Minimum
As you’re figuring out how your budget breaks down, see if there’s an opportunity to pay more than the minimum payment on your loan. The more you pay on a loan, the fewer payments you have to make over time – with less interest, by the way.
Just adding an extra $20 every month can have a significant long-term effect. It translates into about $240 in extra payments every year, which may even be more than one payment alone!
That is a much more useful way to spend a bit of extra cash than to get a few beers or order a pizza. Start thinking about how to pay off a loan early in small amounts like this and the whole process becomes easier to manage.
5. Make Payments Frequently
Another thing you can do to pay off a loan faster is to pay more often than expected. Turn your minimum monthly payment into two biweekly payments each month, which should add up to more than the minimum.
This doesn’t mean you have to double your payment, but it does help you pay more over time. A good way to do this is to schedule your payments to line up with your paycheck. Every time you get paid, put money towards your loan then allocate the rest within your budget.
6. Find Ways to Make Money on the Side
If you’re having trouble making your budget stretch, it may be time to look into a side gig. Many people bus tables on the weekends or bartend at night to make ends meet, especially right out of college or when starting a business. They’re hungry for financial freedom and they understand the long hours now are worth the reward later.
But, a side gig could be something you have a passion for, too! If you have a skill like graphic design, playing music, or doing handy work, you can market those in your spare time. It might mean you get a project here and a short-term job there, but, the money still adds up and helps you pay off your loan.
7. Use Any Unexpected Earnings
Sometimes, you come into money without even expecting it. You may get a raise at your current job or sell something for more value than you estimated, or maybe inherit a bit of cash. Either way, the best thing to do with such an income is to apply it all towards your loan.
Think about it – this is money you never expected to have in your budget. If you’re doing fine with paying rent and buying food and other necessary expenses, you may as well put all this money into something that’s lingering over your head, like a loan debt. It clears what you owe (or helps) so that the next time you stumble into some money you can use it for other things.
8. Try to Refinance for a Lower Rate
The final thing you can do to help you manage how to pay off a loan is to refinance. See if you’re able to get a lower interest rate, or at least lower minimum payments. You have to understand the difference between these two options, though.
A lower interest rate on the same monthly payment means you could end up paying back less money in the long-run. It’s a good thing to do. A lower monthly payment doesn’t work that way.
When you apply less towards your loan it’s easier to manage a budget in the short-term, but you end up paying more over time. This is why you should go for the lower interest rate or just not refinance at all.
How to Pay Off a Loan and Make the Most of Your Money
Understanding how to pay off a loan can seem a bit daunting at first, but it’s easier to do when you look at it month by month. Try to find more wiggle room in your budget to apply towards your loan and to create a better quality of life overall.
As you get closer and closer to paying it off in full, you can start to think about things like investing or saving up for a special, large expense. Whether you’re interested in buying a home or finally taking the vacation of your dreams, paying off your loan first helps you do these things with less stress.
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