The best method to repay each type of loan

If you sometimes dream of being thrown into an old-fashioned debtors prison, it’s no wonder. According to a recent analysis by research firm Gallup, which based its information on data collected by the Federal Reserve, the average household has $ 7,828 in revolving credit card debt. Meanwhile, Americans are also juggling mortgages, auto loans, student debt and personal loans. In fact, earlier this year, the US Department of Education released a report noting that more than 40 percent of Americans with federal student loans are behind on payments.

So what is the best method to pay off each type of loan? Experts recommend the following approaches.

If you pay off your mortgage slowly, month after month, so that someday in the distant future it will be paid off, you are doing it right, according to most experts. This is for a variety of reasons, ranging from the possibility of getting a large tax deduction to the simple fact that you could use the money that goes towards your home loan (which hopefully has a low interest rate) on just about anything else, from retirement to university savings for your child.

But if you want to pay it off faster than the standard 30-year period, then “the best way to pay off your mortgage is to make regular additional principal payments each month,” says Sandy Young, founder of SY Financial Group in Hampstead. . , Maryland.

“Run an amortization schedule and follow it,” she suggests. “Making your monthly payment every two weeks could also be an advantage. This would equate to an additional monthly payment each year. “

But, again, the question you should be asking yourself is: can you afford to do this? If you have a loan that’s going to be paid off in 30 years and you pay extra to be able to finish in 26 years (and for those 26 years the money seems tight), will it be worth it?

“Another question to ask yourself is whether or not there are other debts, such as student loans or credit cards, that you want to pay off to improve your credit and reduce your interest payment obligations.” says Sean Stein Smith, a certified public accountant in New York City.

But for most people, slow and steady wins the race.

Same deal, say most experts. However, because an auto loan is usually much less than a home loan, it may make more sense to pay it off faster.

Here, too, making bi-monthly payments can also make sense, Smith says.

It sounds awkward at first, but if you do the math, it makes 26 payments per year, instead of 12 per year. If your car payment is $ 100 per month (just to make the math easier), you would pay $ 1,200 per year if you paid for your car through the conventional 12 monthly payments. However, if you made 26 payments of $ 50 each in a year, you paid your auto lender $ 1,300.

“Very important, by reducing your debt faster you also reduce the overall interest you will pay. Remember that every dollar of interest you pay does nothing to reduce your overall debt,” Smith said.

But talk to your lender, who may or may not authorize this payment structure or may issue you penalties if you prepay the loan.

In this case, you absolutely must pay off as much of the debt as possible, as quickly as possible. Revolving debt, i.e. credit card debt you wear month to month – is a money killer, thanks to the compound interest that only keeps getting bigger and bigger.

If you have a credit card collection with revolving debt and you’re trying to find a way to reduce it, try these suggestions from Katie Ross, Education and Development Manager at American Consumer Credit Counseling, who is headquartered in in Newtown, Massachusetts:

If you have multiple debts, pay off the high-interest debt first. “This will reduce the amount you pay in the long run,” she says.

That said, many experts recommend using the snowball debt method., which describes pay off credit card debt with the lowest balance first, then take the money you save and put it on the next credit card with the lowest balance. But Ross is right, if you want the best method, and if you like knowing the cute names of your credit card reduction strategies, many experts call debt repayment with the highest interest rate first. high avalanche debt method.

Always pay more than the minimum balance. “By paying as little as possible, you make sure that you stay in debt longer and that you’ll probably end up paying a lot more interest in the end,” Ross said.

Don’t use credit cards when you have revolving debt, experts say. “If you’re already in debt, stop using credit to pay for things,” says Ross.

It’s usually pretty straightforward: make your payments on time, and if you’re able, says Coleen Pantalone, professor of finance at the D’Amore McKim School of Business at Northeastern University in Boston, “commit to paying $ 50. $ or $ 100 more each. months on the loan. … This additional amount is used to reduce the loan balance so that your total interest charges over the life of the loan will decrease. “

But it’s just as important to make sure you don’t make mistakes in pay your student loans. For example, Ross says a common mistake is to consolidate federal loans with a private lender.

“Federal student loans come with built-in benefits and protections from the federal government. If you consolidate these loans with a private lender, you are sacrificing these protections, ”she says.

Unfortunately, the best strategies for paying off loans are relatively boring. In fact, if someone has convinced you of a sure-fire, too good to be true method of getting rid of debt fast, you are probably about to stumble upon one of the worst ways to pay off a loan.