How Do I Pay Off My Loan Faster
A burning question on many of my clients lips is “Can I pay off my loan faster than the standard 30 years and if so how do I do it?”
The bottom line is there is no magical way to pay a loan off faster. If you owe $100,000 you must pay back $100,000. When banks work out your repayment the figure is based on the minimum you need to contribute in order to pay the loan off in the required time frame, which is often 30 years. If you repay more than the minimum required, you pay your loan off faster than first predicted. You are able to do this in a couple of ways. You can either pay off lump sums periodically or alternatively chip away by paying a bit extra each time you make a repayment. The second option creates good financial discipline and a regular savings pattern.
If you take out a $500,000 loan over 30 years with an interest rate of 5 per cent, your minimum repayment will be $2680 per month for 30 years. If you added as little as $150 a week to your minimum repayment you will reduce the length of your loan by 10 years!! That is paying your loan 30 per cent faster as you pay less interest.
On paper this is a great idea!! However be careful when deciding to make extra repayments. You are under no obligation to do so, and, there is no point in putting yourself under undue financial stress to get your loan paid off faster. This option is really only appropriate if you have the extra available cash flow on a regular basis and can comfortably afford the extra repayments.
If you are a salaried employee this method is attractive as you know how much you will receive each and every pay cycle and can budget accordingly. Many of us would not save if we didn’t have a plan in place.
Self employed borrowers must consider the cash flow in their business before making a commitment such as this. You may be better off paying extra lump sums during your busy periods and sticking to the minimum requirements during the quieter times.