If paying down debt is on your list of goals for 2020, now is the time to start putting a plan of action into place. Shelling out even a few extra bucks each month can reduce your repayment timeline and save you hundreds of dollars in interest.
Here's a look at how putting an extra $25 each month toward your debt can help you become debt-free faster, and save in interest over the life of the loan.
Typical repayment timelines for a fixed-rate mortgage run 15 to 30 years. As of early January, the average rate on a 30-year, fixed rate mortgage is 3.64%, according to HSH.com. Say you borrowed the average mortgage loan of about $146,962 at that rate. Your monthly payment would be $671, and in 30 years' time, you will have paid $94,764 in interest.
But tacking on that extra $25 per month, increasing your monthly payment to $696, would save you $6,636 in interest over the life of the loan. What's more, you would be done paying off your mortgage almost two years sooner.
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The average student loan borrower graduates with around $37,000 in debt, according to Debt.org, and substantial student loan balances can affect your ability to meet other financial goals like purchasing a home or buying a car.
How much you owe and at what rates can vary widely, depending on factors like what kind of loans you took out and when. Current rates on federal undergraduate loans are 4.53%, for example, but in recent years have ranged between 3.4% and 6.8%. Private loans may have rates exceeding 10%.
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Let's say you owe $37,000 with a rate of about 5% on the combined balance of those loans, and plan to stick with the standard 10-year repayment timeline. Your monthly payment would be $392. However, adding that extra $25 and raising your payment to $417 would shave nine months off of your student loan repayment period, and save you almost $1,000 in interest.
"There are great student loan payment calculators. Just plug in what an extra $20 a week could do for you," Carolyn McClanahan, a certified financial planner with Life Planning Partners in Jacksonville, Florida, told Grow last year. "You'll see that any extra little bit you can put towards your loans will help."
The average interest rate on a car loan is currently about 4.59%, according to Bankrate, though rates vary depending on your credit score. Let's say you qualify for a $25,000 loan on a new car at that rate over 60 months. Your monthly payment would be $467, and you'd pay a little over $3,000 in interest over the life of the loan.
If you can manage to boost your payment by $25, so you're paying $492 per month, that would cut three months off your repayment timeline, and you'd save almost $300 in interest.
And if you're making consistent payments and adding in a little extra each month, experts say it's worth seeing if you can get a payoff deal, which is a quote for a one-time installment payment, plus interest.
"If you are close to the end of the loan and you feel like you're able to pay it off in one installment, it's definitely worth giving [your lender] a phone call to calculate a payoff number for you," Ronald Montoya, senior consumer advice editor for Edmunds, told Grow last year. "They might be able to reduce the interest rate and give you a payoff amount so you can be done with the loan."
High interest rates make credit debt important to pay off sooner rather than later. Consider this: If you're carrying a credit card balance of $3,000 at the average APR of 17.30%, you could eliminate that debt with a monthly payment of $149 for 24 months. However, adding $25 to pay $174 each month would help you be debt free four months earlier.
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Paying down credit debt and maintaining a good credit score by managing your credit cards responsibly can also help you qualify for a good rate on a mortgage, or finance other purchases down the road.
"People tend to overthink credit, but it's really just about paying your bills on time every time, keeping balances as low as possible, and not going crazy applying for too much credit too often," Ted Rossman, a credit analyst at Bankrate, told Grow last year. "If you do those three things, lather, rinse, repeat over the years, your credit's going to be just fine."
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