Many people feel trapped by their debts, however there are a number of ways you can repay your loans sooner and escape the debt trap.
1. Don’t just pay the minimum repayment
This is one of the first traps that people fall into. By paying the minimum repayment you will only be reducing your debt by a very small amount each month, as the majority of your minimum repayment will be eaten up by interest charges.
But for every dollar over the minimum repayment that you pay, the full amount will come straight off your loan balance, and thanks to the power of compounding interest this can have a major impact on your debt over a period of time.
Try to round your repayments up to the nearest $100, or if you cannot afford that at least try to round up to the nearest $10. This may not seem like much, but over time it will certainly help to repay your loans earlier.
If you are planning on making extra repayments, you should prioritise these amounts using the next tip…
2. Repay higher interest debts first
If you have multiple debts to repay, you need to repay the debts with the highest interest rates first. This will reduce your interest bill over time, allowing you to get out of debt more quickly.
You should make the minimum repayment on each debt except for the one with the highest interest. With this debt you need to pay as much as you can afford so that you can pay it off before the others. Once it has been repaid in full, then use the same strategy on your next highest interest debt.
3. Debt consolidation
One of the most popular ways for people to reduce their debt is to use a debt consolidation loan.
A debt consolidation works by rolling multiple debts into a single debt, with the new loan having an overall lower interest rate than the debts that are being consolidated.
The benefits of a debt consolidation can be numerous. Firstly it will reduce your monthly interest bill, which will allow you to reduce your balances sooner. It will also reduce your fees if you are paying monthly fees on multiple accounts, and it will allow you to focus on a single repayment each month.
4. Make your repayments fortnightly
Switching to fortnightly repayments is an easy way to help repay your loans sooner.
Simply halve you normal monthly repayment and pay that amount fortnightly. Because there are 26 fortnights in a year, you will effectively be making 13 full repayments each year. You are only required to make 12 monthly repayments, so this strategy will result in you making one extra repayment each year.
By making one extra repayment each year you will save time as well as interest on your loans, helping you to pay them out sooner.
This is perhaps the best tip for helping you to repay your loans sooner, as well as helping you from getting into more debt down the track.
By creating and sticking to a budget you may be able to identify areas where you can save money each month, and those savings can then be directed towards repaying your loans sooner.
Repaying your loans earlier
To give yourself the best chance of repaying your loans earlier you need to use a combination of strategies.
Most of the strategies detailed above will be more powerful when combined. For example if you were to consolidate your debts into a single loan with a lower interest rate, create and stick to a budget, then put all of your surplus funds towards the debt (paying fortnightly of course) you will be well on the way to becoming debt free.