How to Pay Off Your High-Interest Loans Faster Than Ever
There’s no better time than the present to set financial goals and get on the fast track to paying off your high-interest loans.
Follow these five steps to pay off your loans faster than ever.
Step 1: Understand Your Interest Rates
There’s a cost to using someone else’s money. That cost is interest. Interest is calculated different ways. You may see it quoted as an annual percentage rate (APR) but it can also accrue on a daily, monthly, or quarterly basis. Other lenders tack on interest cost to the outstanding amount you owe on a loan.
Interest rates are often based on your credit score and debt-to-income ratio. The better your score, the lower your interest rate. Higher scores indicate to lenders that you’re a higher risk. But don’t be fooled by low numbers. Home interest rates average about 5% today. That means a 30-year loan for $300,000 requires you to pay $279,000 in interest.
The average interest rate on a credit card is more than triple that at 17%. The average American has $6,000 in credit card debt. If you only make the minimum payments, you’ll pay $8,000 in interest—money that could be going into your savings or investment accounts to make you money. Add up your credit card debt and see how much you’re currently paying in interest.
Step 2: Pay Off High-Interest Debt
With a grasp on your interest, it’s time to focus on paying down debt, starting with your highest-interest debts. Investor.gov considers high-interest debts those with 8% interest or more with no tax advantages. First, figure out the minimum you need to pay for all your debts (the last thing you want is additional fees from not paying lower-priority debts!). Then, calculate how much more you can afford to pay toward your highest debts.
Paying off your highest-interest debt first is called the avalanche method. Another option, the snowball method, is to pay off your smallest balance debts first. “In absolute dollar terms, go with avalanche and shift extra dollars to the highest-interest rate debt first,” says Greg Knight, an Oakland-based CFP®. “If absolute dollar terms are not as important and [you] need the satisfaction of feeling like [you] are ‘winning,’ then use snowball to wipe out a few small debts.”
Step 3: Consolidate Debt
Consider taking out one new loan to repay your outstanding debt. Then, you can focus on paying off this new debt with one monthly payment. Debt consolidation often lowers the overall interest you’re paying, particularly if you have lots of high-interest credit card debt.
Step 4: Avoid Additional Debt
If you don’t have the funds for it, don’t buy it. That doesn’t mean to put down the credit cards. It does mean paying your credit card bill in full every month. As Trent Hamm from The Simple Dollar explains, “Leave your card at home most of the time, and when you do use it, use it for specific purposes” like gas and groceries.
Step 5: Boost Your Budget
New year, new budget. The goal is to earn more and spend less so you can allocate your additional funds toward your debt. One way to earn more is to pick up a side gig, even for just a few hours a week.
The Hometap Option
Debt stress can keep up any homeowner up at night. For some homeowners, tapping into their home’s equity through a Hometap investment is a smart way to pay off debt without taking on any interest or monthly payments.
Take our 5-minute quiz to see if a home equity investment is a good fit for you.
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YOU SHOULD KNOW…
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.
Hometap is made up of a collaborative team of underwriters, investment managers, financial analysts, and—most importantly—homeowners—in the home financing field that understand the challenges that come with owning a home.