Finding simple ways to budget to pay off your installment loan early can seem difficult, but we've put together a list to help you get started, and a discussion of whether paying off your loan early is suitable for you.
Loans can be very helpful when you need a large amount of money quickly, but making payments every month with interest can get old after a while. Don't you wish there was a way to speed up the process and pay off your loan early?
Paying off an installment loan early is easier than you may think, but educating yourself on the benefits and pitfalls of doing so is important. Loans and interest rates vary from person to person, so what is right for someone else may not be right for you.
Read on to learn everything you need to know about paying off your installment loan early!
You're probably more familiar with installment loans than you realize, even if you’ve never heard the term before.
Any loan that is for a fixed amount that is also paid off in fixed amounts is an installment loan.
These monthly payments are known as installments.
Some of the most common types of installment loans are mortgages, student loans, and auto loans.
Paying off your installment loan early can be beneficial for a multitude of reasons, the most obvious being the space it frees up in your monthly budget. But is paying off an installment loan a wise decision?
The truth is that whether paying off your loan early will be problematic depends entirely on your lender. Some lenders will help you pay off your installment loans early, while others may make it as difficult as possible by imposing steep penalties and fees.
Whether paying off your debt early is a smart option depends on you and your financial situation. It can be a terrific approach to eliminate one unwanted item from your monthly budget and ensure it won’t affect you negatively.
Most lenders are going to charge what is called a prepayment penalty, which is a monetary penalty meant to outweigh the money the lender would lose by not receiving the interest that you pay on your loan month to month.
Sometimes, the fee for paying off the loan early is small enough that you will still save money in the long run because of the lower interest rate. Still, in others, the prepayment penalty can cost you more than the remainder of your interest. When deciding whether an early payment is the best option for you, it's critical to check your math.
Aside from the fact that you need a lot of money upfront, the most important benefit of a loan is that it helps your credit score when you pay on time every time. So, what happens to your credit score if you pay off your installment loan early?
Paying off your installment loan early won’t hurt your credit, but it won’t help it either. When you are actively paying on a loan, that loan is considered an open account, but once it is paid off, it becomes a closed account.
Closed accounts do not help your credit, but open ones that are consistently paid on time do. That's not to imply that closed accounts harm your credit; rather, they do nothing to it at all. Paying off your debt early may not be the best option if you want to continue to improve your credit.
A healthy credit history opens many doors that might be closed to you with a mediocre or bad credit history. Don’t take the positive impact of regularly paid installment loans lightly.
When you pay your loan off early, you can save a significant amount of money in interest, especially if your loan was long-term or had a higher than the average interest rate.
As we've already said, one of the problems with paying off your loan early is that some lenders charge a prepayment penalty that can be as much as or even more than the interest you would save by closing your account early.
If you decide to pay off your loan early, save the money on something that will benefit you in the future, such as a retirement or an emergency fund. Creating a solid safety net can help you avoid taking out high-interest installment loans in the future.
Finding a few more dollars in your monthly budget is difficult; much less than enough to pay off your installment loan. Do not be concerned! We've prepared a list of innovative ways to save and earn money.
It's crucial to note that clearing your installment loan ahead of time should never put you in a bind with bills or other necessary payments. When making judgments about your installment loan, it's important to think about all of your financial obligations.
It's tempting to pay the bare minimum on your monthly installment loan. There are moments in our lives when every penny matters, and paying more than is necessary seems agonizing.
If you merely pay the minimum amount due on your installment loan, you aren't making any progress toward paying it off. Spending a little more each time will put you ahead of the game.
Doing this is as simple as rounding up to the nearest $10 figure. Simply adding that extra payment is a great way to get your plan to pay off your installment loan early.
If you think making extra monthly payments is too tough to remember, rounding up or paying extra monthly will help. You'll still have to pay once a month, but you'll be working toward paying off your loan as quickly as possible!
A similar idea is a debit card that rounds up your purchases to the next dollar and puts the difference into a separate account. These nickels and dimes will rapidly build up and can be utilized as a supplement to your monthly installment loan payment.
Making numerous payments a month is the best way to pay off your debt early if you're a little more organized and can handle adding another payment to your monthly plan.
There are a few ways to go about this:
If you keep a written or digital planner, mark these extra payments down just as you would the payments scheduled by the lender. Try to get into the habit of treating these extra payments just like the required ones.
If you don't have enough money in your existing monthly budget to make extra payments on your installment loans, picking up some extra jobs might be the way to go. Don't worry, this doesn't have to imply giving up all your free time.
A few simple jobs and ideas to put some extra money aside for your installment loans are:
Gig work is an outstanding way to earn additional money, but money earned in the gig economy is also taxable income, so keep that in mind when budgeting.
The gig economy has exploded recently, and one of the biggest facets of this new form of work is food delivery.
Food delivery gig work is an excellent choice for extra installment loan money since most of these jobs allow you to work on your own schedule. This way, earning a little more doesn’t have to interfere with your primary job, and once you’ve made enough to meet your goal, you can take it easy.
There’s also the added benefit of tips for a job well done. Who knows, maybe you’ll even have a little pocket change for yourself once you’ve set aside your loan payment!
If the constant in-and-out of food delivery isn’t for you, personal shopping, especially personal grocery shopping, is a great option. You’ll spend most of your time in a cool, air-conditioned store shopping for others, and like food delivery, you can choose when you want to work.
This is a low-stress side job that will allow you to set some money aside and get your installment loan paid off early.
Like personal shopping, package delivery gigs are taking off too. These types of shopping jobs may rely on more driving than the others, but employees are commonly paid more to compensate for the miles driven. Quick and accurate deliveries can net you some significant tip money!
Platforms like Facebook have built-in user sales areas, making getting rid of unwanted items easier than ever. You can not only declutter your home by selling items like an extra coffee maker or some jewelry you don't wear anymore, but you can also use the money to pay off your installment loans.
If you choose to use platforms like eBay, just be conscious of shipping charges when listing your item for sale, so you get the most bang for your buck.
Shipping large things will be expensive, so having delivery fees included in the purchase price will ensure that you don't end up paying more in shipping than you got on the sale!
You could also go the classic route and have an old-fashioned yard sale. You might be surprised at how quickly the sales of your unused items add up.
While you would usually refinance a loan with the goal of having smaller payments over a long period, you can also refinance to pay off your loan sooner. If your credit has improved in the time since you initially got your loan, refinancing can lower your interest rate and enable you to pay the loan off early.
Basically, if your monthly payments are excessive due to a high-interest rate, it will be difficult for you to pay them at all, let alone pay more on them. If you refinance to acquire a lower interest rate and a lower monthly payment, you'll be able to pay more without putting a strain on your budget.
The most important point to remember is that refinancing will not save you money if your interest rate rises or stays the same, as this negates the purpose of refinancing in the first place.
Millions of Americans look forward to the lump sum of a yearly tax return, but if you get a large refund, it might be in your best interest to put that money toward paying off your installment loan early.
If you don't want to, you don't have to hand over all of your tax returns. Any amount you can spare will help you pay off your installment loan ahead of schedule in the long run.
Paying off your installment loan early doesn’t have to be a pain! Try some of these tips to increase the monthly amount you put towards your loan, and you’ll have that monetary weight off of your shoulders in no time.
Some of our favorite tips for paying off your loan early include:
Sit down and carefully weigh the pros and cons of paying off your installment loan early, just as you would with any other big financial decision. Make sure you're saving money by doing the math, and you'll be able to make the best decision for yourself.