Pay Off Loans Quicker to Reduce Personal Debt

4 May

Pay Off Loans Quicker to Reduce Personal Debt

Personal debt can quickly get out of hand if not carefully managed. It is important that people do not rack up too much personal debt, as it can easily destroy the chance of ever having a solid financial base. Personal debt normally has the highest interest rates and fees. If people take too long paying it back, the amount they have to pay back will be off the charts. It is important to pay back personal debt in a timely manner.

For example, someone is making payments on loan that is worth 5,000 and the annual percentage rate (APR) is 7.5 percent. It may only take 5 years to pay this off and the person is paying $100 a month. At the end of the 5 years, though, they have paid $1,011.38 in interest alone.

The interest at the end of the five years is up to twenty-percent. If the consumer would add just $50 a month to what they’re paying, then they will only have only paid $599.12 in interest at the end of that five years and the interest rate would be only 11 percent. By increasing their monthly payments just that little bit, they cut their interest payments and rate literally in half.

This shows that if someone has personal debt, they have to be very careful how they pay it off. If the same person paid it off in seven years their interest rate would be 28% and they would have paid $1,442.08 in interest. The longer a person takes to pay off these debts the more money companies get from them and the more money they waste.

Taking out a short term loan is another way of keeping payments down. When getting a short term personal loan, the company does not have as high of a risk factor. The lower the risk factor, the lower the interest rate will be.

If people pay as much as they can monthly, then they will make repayments at a much lower rate. This way, they also won’t end up having multiple loans out they end up needing to consolidate. There are many situations where there are debt consolidation benefits that can’t be ignored, but with proper planning consumers can ensure they don’t end up knee-deep in debt.

When consumers are looking at how much they can pay on their loan a month, they should try and budget as accurately as possible. Do not always go for the “lowest monthly payment option” because these payments have high interest rates and take a long time to pay off.

They should calculate everything in their budget and try to see how much they can put towards their personal loan. They want to pay the highest they can every month, because this will get it paid off more quickly and smoothly.