An unexpected expense comes up. You don’t have enough to cover it in you “rainy day bucket.” So, may be you’ll get a Personal Loans paid over several biweekly or monthly installments. Loan contract is signed and you are handed a check or cash. All is good.
Reality sets in
Imagine you got a two year Personal Loan. Then, as the installments become due, you may wonder “Two years is a long time and I’ll be paying all that interest. How can I save some money here?” I don’t blame you. Two years is a long time to be paying on a debt. Even if you have “good” credit, a $1000 installment loan over 24 months at a 10% interest rate, assuming that the lenders does not charge other fees like credit investigation fees or loan origination fees (which financial institutions may charge), may cost you about $107 at the end of the term, if all payments made on time. Monthly payments would be about $46. It won’t take that many months before those monthly payments start “getting old.”
So, how do you save some pennies and shorten the term?
Because a lot of the Personal Loans are amortized, most of the interest is payed towards the beginning of the loan. In these types of loans interest is paid on every pay period before any portion of the payment is applied to principal. As interest is calculated based on outstanding principal, the lower the principal balance will lead to a lower interest being charged. Therefore, if you make extra monthly payments, in addition to your regular payments, and you request that the extra payments be applied towards principal (thus causing the principal to get reduced faster), then you will end up paying less on interest. Also, by paying extra towards the principal the term will be shorter. Even if paying extra reduces the term by just a couple of months, that’s a couple of months where you will not need to make payments.
But, what if I don’t have much left over income to pay extra?
Every little bit helps. Don’t be discouraged if all you pay is an extra $10.00 a month. For a $1000 loans, for example, if you just pay an extra $10.00 a month towards principal, you will reduce the principal by $100 in just 10 months. That’s $100 in principal that you won’t be paying interest on.