It stands to reason that overpaying debts can clear them faster. But do you know just how much faster or how much interest you could save? That’s what we’re going to discuss today.
Our St. Catharines car loan experts have been working with a couple of clients to help them improve their credit score enough to qualify for an auto loan. This overpayment subject came up a couple of times and seemed like a good topic for a blog post.
Debts and overpayments
Not all debts can be overpaid. Most car loans in St. Catharines are a fixed amount per month but some will allow overpayments. Not all will. It’s the same for mortgages and personal loans. Many accept overpayments while others don’t.
To find out, ask your lender or check your paperwork.
How overpayments can help you out of debt faster
As that initial discussion with our St. Catharines car loan team revolved around paying off credit cards, we’ll use that as an example.
Let’s start small.
Say you owe $3,000 on your credit card and pay the minimum 1% or $5 per month.
Your minimum payment would be around $71.50 per month reducing to $63 over the first year.
As the amount owed goes down, so does the minimum payment. While this saves money each month, it also extends the term of the debt significantly.
To pay off that initial $3,000 would take 27 years and four months if you just paid the minimum!
It would also cost over $4,000 in interest at an average of 17.9%. As we know, some credit cards charge much higher rates than that!
Here’s another example,
You owe $15,000 on your credit card at 17.9%. You pay the minimum of 1% or $5 per month.
It would take over 100 years to repay this card if you kept to the minimum!
If you could pay a minimum of $300 per month instead of the minimum, you could clear the card in 8 years. It would still cost $13,633 in interest though!
Avoid the minimum payment trap
The easiest way to clear debt is to pay as much as you can afford to pay each month and not rely on the minimum payment. Use that minimum payment to ensure you never miss a month to retain your credit score but top it up as and when you can.
We won’t pretend it’s easy to find an extra $300 a month because we know it isn’t. You don’t even have to find that much. Find what you can, when you can and pay off the debt quickly.