Loans give us a chance to do, buy, and experience things that you simply could never pony up the cash to do. They make owning a home possible. For most people, auto loans the ticket to buying a car. In some ways, loans are even an opportunity to build wealth. And in others, they’re an opportunity to spend like you could be wealthy.
There’s a catch. Borrowing money costs money – and it can cost a lot. You pay fees and interest on your loan, and if you have a higher than average loan interest rate, you could spend years paying interest before you even touch the balance.
If you want to borrow, you need these smart money tips to help you protect your finances when paying back a loan.
1. Always Pay More Than the Minimum
Many people treat the minimum payment as the maximum amount they should pay. Instead, a minimum payment is a bare minimum it takes to prevent you from defaulting on the loan. It will barely make a dent in your balance. Instead, it exists to extend the time it takes you to pay off your debt, which makes the lender more money.
By paying more than the minimum payment each month, you will save on interest over the term of your loan. Plus, you get the satisfaction of watching your balance drop faster!
2. Refinance, Refinance, Refinance
If you have a long-term loan (seven years or longer), then refinancing should always be on your mind. If you’re smart, you will have improved your finances since you took out the loan. That means you will qualify for lowering interest rates later.
Why is refinancing a good idea? Saving a 1-2% on interest can save you thousands over the rest of the life of your loan.
3. Throw Extra Windfall at Your Balance
Did you get a tax refund? Find an extra $100 in your account that you might have used to splurge on a luxury item or an evening out? If you know how to manage a windfall of cash well, you would never use the entire money on entertainment. Smart money management says it’s wise to use any extra money that comes your way to pay off debt first.
Not only will it get you out of debt sooner, but it reinforces good financial habits that will not only help you build wealth but keep it, too.
4. Consolidate if You Have More than One Loan
Do you have a mortgage and a home equity loan? A long list of personal loans? You can simplify your payments and maybe even save on interest by consolidating them.
Loan consolidation allows you to make one payment towards multiple loans, which can make it possible to pay down your balance faster.
Consolidation isn’t the same as refinancing. You do need the right product to make it work in your favor. So, talk to a banker and shop around before accepting any offers.
These Smart Money Tips will Get You Out of Debt
Loans are an integral part of our financial system, and using them can be empowering. However, you do need to remember that loans cost you money. So, it’s essential to look for ways to reduce interest and fees on your debts.
Are you ready for more smart money tips? Check out our post covering our best tips for taking out student loans.