Most people have many monthly expenses like rent or mortgage, utilities, and groceries. That’s why many find it tempting to only pay the minimum balance due on credit card balances and loan obligations. However, by paying more than the minimum, they’d save money on interest, reduce the repayment time, improve their credit, and probably gain much-needed peace of mind.
Below we’ll dive deeper into what happens when borrowers pay just the minimum amount each month, and we’ll look at debt payoff strategies, like debt consolidation, debt snowball, and debt avalanche.
3 Reasons Borrowers Should Pay More Than the Minimum Payment Due
1. It Means Paying Less Interest
Interest is the price borrowers pay to borrow money. By paying just the minimum, most of the monthly payment goes toward paying interest charges. On the flip side, by paying more than the minimum, the balance can be reduced by a larger amount in a shorter period of time and end up saving hundreds or even thousands of dollars in interest charges, depending on the loan type, the annual percentage rate (APR) and total outstanding balance.
2. It Takes Less Time to Repay the Debt
By making just minimum monthly payments, it can take years or, depending on its size, even decades to pay off debt. To become debt free sooner rather than later, borrowers should try paying more toward their credit card and loan payments each month. Once a debt is paid off, there’s more money to put toward a down payment for a house or car, to fund an emergency fund, or save for school or retirement.
3. It May Be Less Difficult to Borrow More Money
When lenders review a borrower’s application for a loan or credit card, they consider the amount of debt the borrower already has. Lenders might hesitate to lend to someone with a lot of debt because that borrower may be more likely to default on their payments. By paying more than the minimum and freeing up their debt load, borrowers often find it easier to qualify for financing in the future.
How to Pay Off Debt
When a borrower is ready to pay off debt, here are some methods to consider:
- Create a budget: A budget is a spending plan based on a person’s income and expenses. Making and sticking with a budget can help ensure there’s enough money to meet their financial needs and goals, including getting rid of debt. There are different kinds of budget strategies to consider, such as: t
- The pay-yourself-first budget – a strategy that encourages you to set aside money for yourself and your financial goals (retirement, savings, home) before spending on anything else. This strategy helps you prioritize your savings and ensure that no matter how much money comes in, some of it will always go towards reaching your financial goals.
- The 50/20/30 budget – a simple and effective way to manage your money. This budgeting concept involves allocating 50% of your income (after taxes) to necessities, 20% to financial goals, and 30% to lifestyle choices.
- The zero-based budget – a method of budgeting that involves allocating each dollar of your income to a specific purpose and balancing out to zero. This strategy helps you create an organized budget that allows you to pay off debt, save for retirement, and still have money for other expenses.
- Choose a do-it-yourself debt payoff strategy: The debt snowball strategy calls for a person to repay their smallest debts first. Assuming the person stays motivated, this is a good option. With the debt avalanche strategy, the person focuses on paying down their debts with the highest interest rate. By paying those debts first, the person has decided to save as much as possible on interest charges.
- Earn more money: With more income, a person can pay more toward reducing their debt. Even if the person has a full-time job, taking on a part-time gig like delivering food, babysitting, or tutoring can make a difference in monthly cash flow.
- Consolidate debt: Turning to debt consolidation can be worthwhile when the borrower has a lot of high-interest debt. Debt consolidation allows a borrower to pay off multiple debts with the proceeds of a new single loan with one monthly payment to make.
The Bottom Line
Borrowers can save money and focus on their financial needs and goals by paying more than minimum monthly payments. Paying more than the minimum each month can help alleviate financial stress and with the right strategies in place get the borrower closer to the debt-free lifestyle they deserve.
About OneMain Financial
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.