According to Bankrate, the average American holds over $96,000 of debt (per 2021 data). That is often across multiple loans and varying interest rates as well as fixed / variable terms. There may also be balloon payments involved (more common in real estate transactions). Let's talk about a few ways to manage debt as an average person.
Also, you can use this multiple loan repayment calculator to test how increasing your payments can save on interest over time. This template works well when you have many loans of different interest rates and different remaining balances.
Here are some general strategies for loan repayment optimization:
- Pay more than the minimum payment: The more you pay each month, the faster you can pay off your loan and the less you'll pay in interest.
- Prioritize high-interest debt: If you have multiple loans, focus on paying off the ones with the highest interest rates first. This will save you money in the long run.
- Consolidate your debt: Consider consolidating multiple loans into one to simplify your payments and potentially lower your interest rate.
- Make bi-weekly payments: Instead of making one monthly payment, consider making bi-weekly payments. This can help you pay off your loan faster and save money on interest.
- Consider refinancing: If you have a high-interest loan, refinancing to a lower interest rate can save you money over the life of the loan. If you don't plan on paying back the loan early, this can often be a good option.
- Use windfalls to make extra payments: If you receive a bonus or tax refund, consider using that money to make extra loan payments. This will depend on how much your interest rate is relative to what you think you can get with investments you are comfortable with.
- Automate your payments: Set up automatic payments to ensure you never miss a payment and to avoid late fees. Sometimes you can also get a slight discount when you do this.
- Avoid default: If you're struggling to make your payments, contact your lender to discuss your options. Defaulting on your loan can have serious consequences, such as damage to your credit score and wage garnishment.
Overall, the key to optimizing loan repayment is to be proactive and disciplined in managing your finances. By making smart choices and paying attention to your loan terms, you can save money and pay off your debt faster.
Here is a robust rent vs own calculator that may be of interest to anyone thinking about buying a home.
Article found in Accounting and Finance.
