How Do I Make Extra Payments on My Loans?
When you are ready to get out of debt, you know that you need to make extra payments on your loans in order to pay off the loan more quickly. It is more beneficial if you make these payments go directly to the principal on your loans. This should be part of your debt payment plan. It seems to be a very straightforward process, but there are things you can do with your bank to make sure that the extra money you are paying is helping you pay off the loan as quickly as possible. You should also understand any fees that are associated with extra payments on the loan so that you can focus the money the best way that you can.
How Are Extra Payments Applied to Your Loan?
When you pay extra payments directly on the principal, you are lowering the amount that you are paying interest on. It can help you pay off your debt much more quickly. Some loans will take the extra payments you make and apply them to the interest that has accrued since your last payment, and then to the principal amount of the loan. Other banks will give you the option of applying the entire amount directly to the principal of the loan no matter when you make it.
If your bank takes the extra payment and applies it to interest first, you can work around this by paying your extra payments at the same time that you make your monthly payment. This way the money will go towards the principal. If you have the option of making a principal only payment, make sure that you check the box on the payment slip and then double check to make sure they are being applied directly to your loan.
The key is to make extra payments consistently so you can pay off your loan more quickly. However, just making extra payments with money that you get from bonuses or tax returns is better than just paying on the loan. If you want to pay off your credit card, you will need to make more than the minimum payment each month to reach your goal.
Are There Fees for Extra Payments or Principal Only Payments?
It is important to fully understand the terms of the loan. Some banks will charge you a fee if you make an extra payment on the loan each month. Others will charge you if you make a principal only payment. You may be able to avoid the fees if you add your additional payment amounts to your monthly payment. However, some loans will charge you a fee if you pay off the loan early.
A mortgage may have a clause where you cannot pay it off early within a certain percentage of time to prevent you from refinancing right away. Although it can be frustrating to pay a fee, you will likely still save money on interest if you pay it off early. However, this may change where you put this debt on your debt payment plan. Additionally, if you are close to the time where the penalty lifts, you may end up saving money by waiting for that period to pass. A few month's of interest payments will likely be less than a $1,000 penalty.
Choose the Best Strategy for Extra Payments
Once you understand the fees associated with extra payments and the way that your payments are applied to the principal, you can come up with the best strategy to pay off your loan more quickly. You may need to pay just one large monthly payment on the loan in order to avoid fees and to pay it off as quickly as possible. If you are paid multiple times a month, you may need to put the money for payments into savings so you will not be tempted to spend it.
If your bank does not charge any extra fees, you may choose to do it each time you are paid. This will make it easier to apply the extra money you receive as soon as you get it. This strategy will stop you from spending the money before it goes towards getting out of debt. It is also important to carefully pick the order that you pay off your debts.
Focusing on just one debt at a time will help you maximize your extra payments and help you get out of debt more quickly. This is because it will reduce the principal on one loan and reduce the amount you are paying on interest. Paying off your highest interest loans first can help you save money and speed up the process.
Making the Last Payment
When you are ready to pay the loan off, you will need to contact your bank and find out the final payment amount. The interest may accrue daily, and so the amount will change. Your bank can quote the amount of payoff for a set number of days. You can make the payment in person if you want to pay the extra amount, or you can send in your final payment by mail or pay it online.
You should check the next statement to make sure that you have paid everything off, and that you do not owe any additional interest on the loan. If it is a car loan, you should expect the bank to mail you the title to your car within the next few weeks. In some states, you may have to contact your local DMV to have the lien holder removed from the title.
If it is a credit card, then you will just need to check your next statement to make sure you do not owe any additional interest. Be sure to check the statements and your balance. You do not want to end up with a ding on your credit because you forgot to pay off the last little bit of accrued interest. Going into the bank to make the last payment can help you avoid this situation.