Sometimes it’s the smallest things that can make the biggest long-term difference when it comes to paying off installment debt, like car loans, mortgages and student loans.
In this case, we’re talking about an additional $25 a month. Certainly, if you were posed with the challenge of coming up with another $25 a month to be able to fund a luxury item that you want and/or deserve, then you would make the appropriate adjustments in your budget to make sure you met it. But things are different when it comes to installment loans, for whatever the reason. Maybe it’s because we already have a fixed interest rate and term and we’d rather allocate extra money elsewhere. Maybe it’s because we’re on a budget and we don’t want to mess with it. Whatever the reason, you’d be surprised at just how much faster you can pay off installment debt — and how much money you can save in interest — with as little as $25 more dollars per month. Let’s take a look:
Home Mortgages
Interest rates are low right now, so if your credit is in good standing and you’re anywhere over 4.25 percent on a fixed term loan, we’d strongly suggest you get in touch with your financial institution and see if it would make sense to refinance to a lower interest rate, reduced term or both. If refinancing doesn’t make sense, then applying the $25 rule to your mortgage each month can be a big long-term help. You’ve likely heard the repayment tip that making one extra mortgage payment per year can help you pay off you home loan seven years early if you have a conventional 30-year mortgage. But if you increase your mortgage payment by just $25 per month, that can help too. On a standard 30-year fixed interest loan, you can likely pay it off up to two years early, not to mention save thousands in interest. It’s no secret that most of your monthly home mortgage payment is interest and not principal. Dedicating just a little bit more each month beyond the minimum principal can make a big difference.
Student Loan Debt
We’ve covered student loan debt quite a bit in this forum, namely how college is becoming more and more expensive and graduating students are accruing more and more debt. In fact, it’s estimated the average college grad has nearly $40,000 in debt to their name upon receiving their diploma. While you could wait to enact any strategies until we see who wins the 2020 U.S. Presidential election when it comes to government-held loans (candidate Elizabeth Warren has already said she plans to cancel student loan debt on her first day in office, and many other Democratic challengers have voiced ways to help mitigate or erase student loan debt too), the bottom line is that student loan debt has the potential to get in the way of other life goals. This is especially true when you consider that some student loan interest rates are at or above 10 percent. Let’s say you owe about $35,000 in student loans. Applying an extra $25 toward your principal balance each month can help you pay off your debt up to a year sooner.
Auto Debt
Auto debt usually isn’t as significant when it comes to installment debt, and paying it off early for a few reasons. One, interest rates are generally pretty low. And two, the loan timeline is usually five to six years. That said, if your credit isn’t great and the interest rate is high, or if you’re financing an expensive car, it might make sense. Increasing your monthly payment by $25 on an auto payment could shave several months off of the installment loan timeline.
Though 2020 is well underway, one of the most common New Year’s resolutions or goals is to become more financially sustainable, and this may include paying down installment debt after any revolving debt (i.e., credit card debt) is managed. Assuming you didn’t magically come in to thousands of dollars that you can allocate toward this purpose, there’s a good chance you can afford an additional $25 per month. It may not seem like a lot, but you’ll be surprised at how much it can help.
