If you’ve borrowed a large sum of money for a recent major purchase, then chances are that you’ve entered what’s called an installment loan. In this post, we’ll explain what an installment loan is and some strategies you can use to pay it off.
What is an Installment Loan?
So, what is an installment loan? An installment loan is any loan where the payments are broken up into fixed monthly payments. Some classic examples of installment loans include:
- Auto loans
- Debt consolidation loans
- Personal loans
How to Pay Down Your Installment Loan
If you’ve got an installment loan, here are a few good tips to pay it down.
1. Work It into Your Budget
The best way to cover any payment is to plan for it. This can be done by working it into your budget.
Don’t already have a budget? You can get one started by listing all your monthly expenses and then comparing them to your income. If your expenses are greater than how much you earn, you’ll need to go back and trim the fat from your purchases.
2. Switch to Bi-Weekly Payments
While most installment loans work on a monthly basis, many lenders will offer consumers the possibility to switch to what’s called bi-weekly payments. This is where you’ll make a half-payment every two weeks instead of once per month.
Even though that might not sound like a big difference, remember that since there are 52 weeks in the year, you’ll make 26 payments. That’s the equivalent of 13 months of payments, so you’ll make one more than the 12 you’d make on a regular monthly schedule.
3. Use a Debt Acceleration Strategy
When you’ve got multiple loans or credit card balances, a payoff strategy like the debt snowball is a common way to tackle this. You can also use a personal loan consolidation calculator to help you strategize your payment plan. This is when a person will focus on paying off their smaller debts, and then once it’s paid off, they’ll roll those funds towards the next highest debt. It not only helps you to eliminate each one systematically, but it also lets you budget additional resources towards paying it down faster.
4. Put Extra Money Towards the Principal
Have you recently received a raise at work or a bonus? If so, then a way to spend that income is to apply it towards the principal portion of your installment loan.
Paying down the principal early helps to knock payments off the backend of your loan schedule. It can also potentially eliminate thousands of dollars in interest over the life of the loan.
5. Refinance Your Loan
If interest rates ever change or you’d like to change the terms of your payments, you always have the option to refinance your loan. The classic example is when someone goes from a 30-year mortgage to a 15-year one. Not only could they possibly get a better interest rate, but they’ll also have a more significant percentage of their payment going towards the principal, which will help pay it off faster.
The Bottom Line
If you’ve got an installment loan like a mortgage or auto loan, there are several good ways to pay it off. Be sure you’ve budgeted for it and try various strategies like the debt snowball, paying down the principal early, and making bi-weekly payments. Remember, you can also always refinance for more favorable terms.