Repaying Your Loan Early to Save Thousands

When considering flexible repayment loan products, a major factor should be how easily they assist you in paying off your loan quickly. The reason you should want to pay off sooner rather than later is that by paying it off sooner you will save money in interest payments. The longer you take to pay off a loan, the more interest payments you will accrue.

The basic concept for putting more into your loan to pay it off quickly is simple. If interest rates didn’t change, neither would your repayment amounts, due to the way they are calculated. Each repayment is made up of two portions, namely a principal portion and an interest portion. When you begin repaying a loan, a very small portion of each repayment is paying down the principal of the loan, while the vast majority repayment is servicing the interest. The interest portion is calculated on the loan balance and the loan balance reduces with each repayment. The more you can reduce your loan balance, the lower the amount of interest there will be, which in turn allows the portions of your repayment paying off the principal to be larger.

Another strategy you can use to pay your loan off more quickly is to make fortnightly repayments. There are 12 months in a year, so if your principal and interest repayments were, say, $1,000 a month, you would have paid $12,000 i loan repayments by the end of the year. As there are 2 fortnights in each month, you halve you monthly repayment amount to give you a fortnightly repayment of $500. As there are 26 fortnights in a year, you would have paid off $13,000 at the end of the year if you pay fortnightly, which is equivalent to one extra monthly payment of $1,000 over that 12 months. This extra payment, dollar for dollar, reduces the principal of your loan.

Lenders will offer you a number of flexible products which will allow you to put extra funds into your loan, or into an account which will offset your loan balance. These include redraw facilities, offset accounts and all-in one accounts. The most important thing to remember it to be disciplined in your spending and saving. There’s no point in having flexible products if you have no money left to put in them.