February 14, 2019

Three ways to pay off debt faster

A smiling couple on a couch looks down at a pad of paper. A smiling couple on a couch looks down at a pad of paper.

Whether you’re still in high school, preparing for retirementOpens in a new window, or anywhere in between, there’s a good chance you are going to be carrying some form of debt.

With expenses like housing, schooling, and simply the cost of living, debt is something difficult for most people to escape. That doesn’t mean it has to weigh you down forever, though. There are ways to get out of debt faster and avoid the stresses of constantly having to pay back money.

Pay debt off bi-weekly

When you have a large debt that will take years to pay off, like a mortgage, there are significant benefits to making bi-weekly payments as opposed to monthly payments. We pay most bills monthly, so it’s natural to want to do the same with a mortgage. However, making payments more frequently will lower your debt faster.

Here’s how it works:

Let’s say, for example, you have a mortgage of $300,000 and your monthly payments are $1,000 a month, and bi-weekly the payments are $500. By paying monthly, you’ll make 12 payments in a year for $12,000, whereas bi-weekly you’ll make 26 payments of $500 for a total of $13,000. That extra $1,000 a year may not seem like a lot with a huge loan, but it will add up and make a huge impact over time.

If your mortgage has a 25-year amortization period, that’s an extra $25,000 you’ll be paying down over the lifetime of your mortgage simply by adjusting the frequency of your payments. This will help you pay off your mortgage faster and reduce the amount you owe, meaning you will also be paying less in interest over time.

Make more than the minimum payment if you can

Often when we start paying back debt we get comfortable with making the minimum monthly or weekly payments. It’s something people can budget for and work into their regular bills. That shouldn’t be your plan indefinitely, though.

In addition to lowering your balance, if you are at a point in your life where you can pay a little extra each month on a credit card or a student loan, it will ultimately reduce the amount of interest you need pay each month. That means more money in your pocket.

This, of course, is easier said than done. It’s not always possible to pay more than the minimum amount, but be ready to take advantage of the opportunity if you can. Maybe you just started a full-time job out of university and aren’t at a stage where you are planning to get married or buy a home just yet. That could be a time where you are able to drop more money on each payment if your loan allows it. Just adding an extra $100 or two more than the minimum could go a long way in paying back your loan quicker.

You might think it’s wise to put that excess income away and save it, but keep in mind that reducing your debt and the amount of interest you pay also helps you save money every month.

Try and make a lump-sum payment

This follows the same philosophy as the above point in reducing the amount of interest you need to pay by lowering your balance quicker.

The difference here is paying a large one-time amount instead of increasing your minimum payments. Again, not always realistic. However, if you come into some money from something like a tax refundOpens in a new window, work bonus, or inheritance, paying down a loan is never a bad idea. Some people may think they can just put this money aside and make their minimum payments by using these funds, but dropping the entire amount on your debt reduces the balance quicker and the interest you have to pay in the process.

This information is general in nature, and is intended for informational purposes only.  For specific situations you should consult the appropriate legal, accounting or tax advisor.

Talk to an expert

Not feeling confident in your finances? You can talk to one of our financial security advisors who will work with you to craft a financial plan tailored to your needs.

Contact an advisor