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Last month I was able to pay off my auto loan, about a year and a half early. In addition to the positive effect it has on my credit score, and that I don’t like my hard earned cash going to someone else if I can prevent it, I wanted to pay off my auto loan before my maternity leave started in February.
Related Post: My 3 Habits For A High Credit Score
Related Post: Pay Off Auto Loan Or Roof Repair
I was able to pay it off by following five strategies for paying off debt fast.
Setting up automatic payments means that I won’t forget to write the check and mail it. My hubby once forgot to pay a credit card that he charged a couple of Little Caesar’s Pizza to, and the $15 in pizzas blossomed to $100 once late charges and interest were added in.
Related Post: 9 Reasons Why I Pay My Credit Card Every Week
I had my auto loan set up for automatic biweekly payments, which means half the minimum payment is paid every two weeks. Besides that it lowers the interest portion of each payment than if I paid monthly, I actually make an extra payment on the loan, 13 monthly payments rather than 12 monthly payments.
Payments Larger Than Minimum Payments
While the minimum monthly payment was around $220, I actually made biweekly payments of $140, which means I paid $280 a month (plus the 13th payment of $280). Making the bare minimum payments drags out the loan, which is like pulling the band-aid off slowly.
Putting Extra Cash Towards Debt
Anytime I had extra cash, like a bonus or a tax refund, I applied a portion of it towards the auto loan. Anytime I noticed my cash balance was creeping higher, I also put a portion of that increase towards the auto loan.
Large final payment
Once I reach a point in the loan where the remaining balance can be paid off without causing a big disturbance in my cash balance, I make a large final payment. In January, I had $1800 left on my auto loan, so I bit the bullet and made an $1800 payment rather than the usual (automatic) $140 payment. And now, my car is paid off and I won’t have to make payments during my maternity leave. Yey!
These five strategies can actually be applied to any kind of debt, whether it be a credit card, auto loan, student loan, mortgage, etc. I tend to pay my credit card weekly, and I already paid off my student loan using these five strategies. I haven’t been using these strategies on my mortgage because I’m concentrating on eliminating the smaller debts first, and for some reason, the credit union won’t allow me to set up biweekly payments, or automatic payments larger than the minimum amount. I also have a personal loan for repairs on my roof, which I automatically pay biweekly an amount $50 more than the monthly minimum. I’ll start making extra payments once I return to work. That is, if daycare expenses don’t suck my cash flow dry.
Related Post: Daycare Is Expensive. And Totally Worth It.
Now let’s see how fast I can pay off my personal loan.
There are three major habits that I practice to keep my credit score high, in the high 700’s to low 800’s, depending on which credit agency you check.
Check Credit History Regularly
The first habit is to regularly check my credit history to make sure nothing weird or incorrect is showing up, like a loan or a credit card that I don’t recognize. To check my credit score, I have a free account at Credit Karma, which I log into at least once a quarter. I recently took out a personal loan to cover the cost of a roof repair, so I checked my credit score when I applied for the loan to make sure the loan officer wouldn’t have a reason to decline my loan application.
Related post: Pay Off Auto Loan Or Roof Repair
Frequent Credit Card Payments
My second habit is to make frequent payments on my credit card, usually every week or so. I time it around my weekly payday so that I know I have incoming cash. Paying frequently makes it easier on my cash flow, keeps the credit card balance from getting too high, and allows me to regularly monitor my expenses and determine if I’m spending too much money.
Related Post: 9 Reasons Why I Pay My Credit Card Every Week
Pay Off Debt Early
My third, and probably most effective, habit is to pay off loans early, which I do by using three specific methods.
Firstly, I set up biweekly loan payments whenever possible so that I pay less in interest and pay an extra months payment.
Over time, that extra payment every year adds up. There are two loans, the mortgage and my hubby’s student loan, that for some reason does not allow automatic biweekly payments. But my other loans, my personal loan for a roof repair and my auto loan that I just recently paid off had no problem with biweekly payments.
Payments Larger Than The Minimum Payment
Secondly, most of my loan payments are larger than the minimum payment. It’s easy to do when you make automatic biweekly payments. Just pick an amount higher than half the minimum payment that the bank should deduct out of your bank account every two weeks, and voila, you’re paying more than the minimum payment.
Large Final Payment
Lastly, I pay off the entire remaining loan balance when I reach a point in the loan where doing so won’t cause much disturbance in my cash flow. Most recently, I paid off the remaining $1800 on my auto loan a few weeks ago so that I wouldn’t have any payments during my upcoming maternity leave.
In addition to these three main habits, I’ve noticed that when I carry a credit card balance that is larger than normal for more than a month, my credit score tends to dip a little. It’s probably because my credit card utilization increases during that time, which can affect your credit score.
Late last year, on December 10, 2015, I refinanced my public student loan with a private loan of $11,000.00 from my credit union to take advantage of the lower interest rate of 5% rather than the original rate of 6.55% with Mohela. My first payment of $329.68 was due in January 2016, and the last payment is due December 2018 (3 year loan).
To pay off the loan faster, I immediately set up automatic biweekly payments of $164.82 to start on December 25, 2015, and occur every two weeks. I just asked the loan officer if I could have the amount automatically deducted from my account (with the same credit union). He calculated when the deductions would have to occur, and set them up. This way, not only do I make the required monthly payment of $329.68 ($164.82 X 2), but I actually make one additional monthly payment since there are 13 payments of $329.68 (26 payments at half the monthly payment) rather than 12.
At that rate, my last payment will be three months early, on September 14, 2018, rather than the scheduled December 8, 2018.
Then in June 2016, I walked into the credit union and asked the teller if I could increase my biweekly payment from $164.82 to $180.00. The teller filled out the paperwork for me, I signed the bottom, and the first $180.00 biweekly payment was deducted from my account on July 8.
Two weeks later, I walked back into the credit union, spoke to another teller, and increased my biweekly payment again, to where it currently stands at $205.00, which started on August 5. My monthly payments now total $410.00 ($205.00 X 2), and I still make 13 monthly payments a year.
At this rate, my last payment should be on March 30, 2018, almost nine months ahead of the original schedule.
Don’t let student loans, or any loan for that matter, scare you into thinking that you’re in a hopeless situation. Not only are biweekly payments easier to manage, and ease the stress on your cash flow, but they actually pay the loan down faster (here is the biweekly payment calculator to calculate your loan payments). The scheduling of my automatic student loan payments means that I never have to worry about missing my biweekly payment.
And whenever I want to increase my payments, I just walk into the branch and speak to the teller.
Paying off your debt does not have to be hard. In fact, you can make it so easy, it becomes automatic, literally. All it takes are two easy steps:
1) Open and read all your statements thoroughly. You need to know how deep in the hole you are to know how to dig yourself out. When I first talked about paying off my debt back in January, I did not bother checking how much we owed on my hubby’s student loan, and just assumed it was around $30,500. Nine months later, while I was reading all our statements to do an update on our debt status, I finally opened one of his statements to discover that not only was my estimate off by approximately $4,000 and we owed $34,657, but that we were also on the worst payment plan ever. We have paid $1,459.41 on the loan since May, with only $169.55 going to the principal, and the remainder towards interest.
I was furious at myself for the rest of that night. That’s what happens when you don’t look past the current due section of a loan statement. Make sure to regularly read ALL your statements THOROUGHLY. If you don’t understand something, call customer service.
2) Set up automatic payments. You don’t have to worry about making a payment on-time, or getting to a computer to make the payment. If you set up automatic payments for more than the minimum payment, not only will your payments be on-time, but you’ll actually pay it off faster. You can even take it a step further and set up automatic biweekly payments, so that you’ll pay half the amount twice a month. Biweekly payments help you save on interest and pays off the debt a little faster than monthly payments. For example, I have my weekly paycheck direct deposited into two separate bank accounts. In the first bank account, I deposit just enough cash to cover my mortgage and student loan, plus a little extra as a buffer. I also have my monthly mortgage and student loan payments automatically deducted from this bank account (I would do biweekly payments, but the loan holders’ won’t allow it). This bank account is used only for these two loans, so that I never have to worry about having enough cash.
Then I have the remainder of my paycheck deposited into a second account, which I use for my variable expenses, like my credit card payments, electricity, etc. This way, the only time I think about my loans are once a month, when I read the statements to make sure everything is as expected.
The only other times I think about my debt is when I’m checking out interest rates to compare them with mine, or when I’m making an extra payment in addition to my regularly scheduled debt, because the only way to eliminate your debt is to make extra payments.