The 7 P's of Early Loan Repayment

You have negotiated the best possible terms for your new loan, whether it is an auto loan, personal loan or a mortgage. Congratulations! Now, how would you like to pay it off in half the designated time? Early loan repayment is doable, if you follow the 7 P's.

1. Prepayment penalty? The first step is to make sure you won't be hit with a prepayment penalty. Read all of the fine print, and even check with your lender to verify.
   
   
2. Pump up the payments. The key is to add extra money each month to your regular payments. Figure out how much extra you can afford and commit to paying the accelerated payment. This may mean cutting spending in another area or increasing your income. Keeping your goal in mind will make it easier.
   
   

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3. Put money towards the principal. You want to make sure your extra money is going towards the principal, not towards interest or extra payments. As the principal goes down, so will the interest.
   
   
4. Make early loan repayment painless. Set up automatic payments through your bank. Most will let you decide the date it is withdrawn, so you can make sure to have enough in the account. You will also avoid late payments and fees.
   
   
5. Persevere. It may seem like the balance is dropping too slowly, but the decrease will speed up the closer you get to your goal. Make sure you have a separate emergency fund so that you can continue to add extra to your loan, even when life throws you a curveball.
   
   
6. Practice patience. Break your large goal of paying off your loan early into smaller, doable goals. As you meet each milestone, reward yourself. Motivate yourself with an ongoing chart that shows the decreasing balance.
   
   
7. Prepare for your credit score to skyrocket. Whenever you pay off a loan early, your credit score will take an upward leap. Ours jumped 60 points when I paid off $4,000 in credit card debt, and also jumped when I paid off our van loan two years early.

We are two years into an aggressive prepayment plan on our 40-year mortgage. Both years I met the yearly goal, and things are on track to continue our quest to pay the loan off in 20 years or less.

How is this plan different than a bi-weekly plan? Often, you have to pay the lender to set up the payments, and you are just making extra payments, interest included, to the loan. Even though the balance will be paid off early, you will still be paying interest.

Another option is to make one large extra payment a year, perhaps with your tax refund or a bonus check. As long as it is going toward the principal, it will work the same as extra monthly payments.

So what are the advantages early loan repayment? The best is the amount of interest you will save. I estimate we will save over $125,000 in interest when we pay off our mortgage. Plus, you will have all those extra months and years of no payments, freeing up your income for other things.

It may seem an impossible dream, but if you really want to pay off your loan early, you can do it too. You may have to forgo that expensive new car with the high payments, or skip going out to eat every other month, but you can find the extra money. With a firm goal and a little determination, you can pay off your loan early.

Shaunna Privratsky is an expert in personal finance, living frugally with her family in North Dakota. Between writing, reading and gardening, she is always on the lookout for bargains. Please sign up for the free newsletters at The Discount Diva.

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