Personal loans are a great way to secure that major purchase, holiday or to handle an emergency. After you’ve having spending all that money, you need to start thinking about paying back your loan.
Because interest payments can add up quickly, we’d all do well to pay off our personal loan sooner. So how to reduce interest and pay off your personal loan faster? We’ve come up with some simple ideas to help you manage your personal loan repayment with minimal hassle.
Switch to fortnightly payments
We’ve mentioned the idea of switching up your repayment cycle before when talking about paying off your home loan early. The same idea applies here, if you’re repaying your personal loan monthly you’ll be making 12 repayments a year. And if you split these into two fortnightly repayments, you’re probably not going to notice the difference in your bank balance. So this makes 24 repayments a year, right?
Not really. Because there are 52 weeks a year however, there are actually 26 fortnights and by paying fortnightly, you’ll be making 2 extra repayments a year. On a $30,000 loan, over 5 years at a 9.51% comparison rate, you could save $1,326.44 in interest payments!
Rounding up your numbers is another relatively painless way to take a little bit off your debt each time you make a repayment. Say your monthly repayment comes in at around $439. Rounding this up to $440 or $450, even $500 can seem like a laugh at the time, but you’ll very quickly realise that this can make a big difference to cutting down the amount of interest you need to pay.
This one’s really straightforward. If you can, extra lump sum repayments here and there will work wonders in the long term to pay off faster. Do check with your loan provider before you do this, or ideally before you settle on a personal loan because some lenders will charge fees for extra repayments. In most cases however, established banks will be fine with this and you can double-check the terms of your loan to be sure.
Refinancing or “debt consolidation” involves switching to a new personal loan with better interest rates and fees. It’s a great way to reduce interest if you’ve gone and settled for a personal loan without comparing the terms of each. With lower interest rates, you’ll notice a big difference in the amount of time it takes you to repay your personal loan.
Another trick involves refinancing your personal loan into your home loan. By consolidating your debts, you’ll simply need to add your original personal and home loan repayments together. As long as you continue to pay the original repayment amount, you will benefit from the lower interest rate of your home loan, and you’ll be paying off your personal loan much quicker. Just don’t cut down your personal loan repayment or it will be sitting for ages on top of your mortgage!