When it comes to managing your money responsibly, it’s a good idea to check in with your finances from time to time. This practice can help ensure you’re sticking to your financial plans and doing so efficiently. A lot of things can change in the course of a few months.
For example, maybe you got a raise last quarter, and you haven’t revisited your budget yet. You might have more money in your budget and want to recalculate how long it would take to pay off your loan.
Why would you want to pay off your loan early? Lowering your debt-to-income ratio can increase your net worth. This is an important step toward achieving financial health and building wealth.
While many have found themselves tightening their belts as a result of the COVID-19 pandemic, other groups are feeling more confident in their ability to manage as a result of stimulus checks and lower life spending in general.
If you’ve found yourself with a little more financial flexibility, a few simple calculations can give you a clear picture of what it will take to pay off your loan faster. With a few quick exercises, you can calculate your loan repayment timeline, make adjustments to your cash flow, and get out of debt faster!
How to Calculate Your Loan Repayment
The average loan repayment timeline often depends on the amount of the loan, your monthly payments, and your interest rate. Many auto and mortgage loans will have a set repayment timeline within their terms. However, that doesn’t mean you have to stick to that exact timeline.
If you can pay off your loan faster, you could save a significant amount from less interest accrued.
Average Loan Payoff Timeline
Not everyone is a mathematician, but calculating how long to pay off a loan shouldn’t feel like a daunting task. All you need to do is find a few key numbers and find a formula or calculator. This process can help you consider different payoff scenarios.
Loan Information to Gather
You’ll need to gather some information about your loan to get started. These numbers will help you plug and play when using a loan payoff formula or loan payoff calculator. The information you’ll need should be available in your loan contract, in your online banking platform, or on your most recent loan statement.
The most recent loan statement will be the most helpful resource, because it will give you the most up-to-date balance on your loan.
Once you’ve tracked this resource down, you’ll want to extract the following information:
- Monthly principal payment
- Monthly interest payment
- Outstanding balance
- Annual Interest Rate (APR)
In the case of a mortgage, you’ll want to exclude any property taxes, insurance, or other charges that may be included in your monthly payment. You will use the above numbers in a formula or calculator to see what it will take to change your loan payoff timeline.
The Loan Payoff Formula
You may feel comfortable doing this exercise with the loan payoff formula if you’re savvy with numbers. You can use a calculator or set up the equation in a spreadsheet to calculate how long it will take you to pay off the loan based on what changes to your payments you want to make.
The Loan Payoff Formula: N = -[In (1- [(PV* i)/ PMT_])/ In(1+ _1i)
If your brain is shutting down just looking at that – no sweat – keep scrolling. We have more tools that can help you. If you’re up for the challenge, it’s time to break down how to fill in the formula with your loan information.
Start with identifying the four variables:
- N = the number of months remaining
- PV = outstanding loan balance (present value)
- PMT = monthly payment
- i = monthly interest rate
In stands for the natural logarithm, the math function used to calculate exponents.
If you have a fixed interest rate, using this formula will be easier. If you have a variable interest rate, just use the current rate.
When using this formula, you can adjust the monthly payment amount to see how the number of months remaining may vary. Here’s a helpful guide on how to use the formula.
Here are a few ways you can change the calculations to try out different scenarios:
- Use the formula to calculate how many months will be remaining if you paid the minimum amount required each month. Use this as a baseline.
- Calculate different scenarios where you pay a little more each month.
- If you have a specific timeline in mind, figure out how much you’d need to pay per month to achieve that timeline.
Financial Tools That Can Help
If you’re like most people, using a formula, remembering the order of operations, and calculating everything yourself is probably not the most appealing option. Luckily, there are plenty of tools that can help you.
Most financial education websites provide a calculator for every financial scenario you can think of. Even your bank may offer a few payoff scenarios during the lending process.
There are many FinTech companies creating tools to make money management easier, including BrightUp! As a financial benefit provider, we offer financial wellness tools to employees in a mobile experience. Workers and their loved ones can track their finances with cash flow projections and budget trackers, and also receive virtual personalized financial coaching from an expert.
It’s the kind of thing that comes in handy when setting goals like paying off your loan.
Now let’s put these tools to the test. Say you took out a personal loan to cover your wedding expenses. You and your partner borrowed $7,000 at 10.28% Annual Percentage Rate (APR) with a 5-year term.
Here are a few scenarios to shorten your repayment time.
If you can afford to double your monthly payments now, you could save over $1,000 in interest in the long-run. That’s $1,000 more to put in your emergency savings or deposit into a 401k to grow your wealth over time.
Ways to Pay Off Your Loan Faster
Now that you’ve calculated a few scenarios and selected your ideal payoff timeline, it’s time to make it happen! However, before committing to these changes, it’s important to note the pros and cons of paying off your loan early.
Pros of Paying Off Early:
- Save money on interest. The less time you pay your loan, the less interest accrues.
- Free up more money. Once you’ve paid off your loan, you’ll be able to use the money you had allotted for the monthly payment elsewhere.
- Lower your debt-to-income ratio. A lower debt-to-income ratio will improve your credit score and allow you more freedom when you may need to borrow in the future.
- Peace of mind. There’s nothing better than achieving financial flexibility and working toward wealth!
Cons of Paying Off Early:
- You might get penalized. Lenders depend on interest to make money. Some lenders may include a prepayment penalty clause, so they can recoup any money they’ve lost.
- Your credit score could go down. While it may seem counterintuitive, paying off a loan can change your credit history, resulting in a dip in your score.
- You may want to use that extra cash elsewhere. If you have a low-interest rate compared to other debts you’re paying off, your loan may not be the best place to put that extra cash.
Again, it’s essential to take a holistic look at your financial situation. For example, if you need to improve your credit history, you may not want to pay off the loan faster. Or, suppose you have a credit card with a significantly higher interest rate than the loan.
In that case, you might be better off paying extra on those payments.
Adjust Your Budget
Maybe you didn’t get a raise or a bonus to help you pay down your debt, but you still want to increase your payments anyway. There are a few responsible ways to make that happen.
First, you’ll want to sit down and look at your month-to-month budget. With BrightUp’s financial planning tools, this process should be a breeze. Between the budget tracker and spend/income analysis, you should be able to quickly identify areas of flexibility.
Here are three places in your budget to look for flexibility:
- Grocery budget: Can writing a grocery list every week or meal planning help reduce the amount of money you spend each month? Don’t forget to look out for sales and coupons!
- Subscriptions: Whether you’re a super-streamer or love opting for the paid apps on your phone, take a look at whether you’re using those subscriptions. Which ones can you cut back or rotate access to month to month?
- Utilities: Are you taking extra long showers or leaving your lights on all day? Even a few small changes to your daily habits could reduce your monthly utility payments to free up extra cash.
Consider the Snowball or Avalanche Method
Suppose you do have the extra cash to boost your debt payoff strategy. In that case, there are a few different methods you can use to identify which debt payoff will give you the most significant savings. The higher the savings, the more money you have to invest in your financial freedom.
There are two primary techniques to accelerate your debt payoff: the debt snowball and debt avalanche methods.
These techniques are great options for paying down most types of consumer debt:
- Student loans
- Auto loans
- Credit cards
- Medical bills
- Personal loans
Snowball Method
Debt can snowball out of control, but you can use the same concept to approach paying down your debt. First, pay above the minimum amount to pay down your smallest debt. Then, carry that money over to the next smallest debt when that debt is paid off.
Over time, the amount of discretionary spending you have available makes it easier to pay off larger debt payments.
Avalanche Method
The avalanche method uses extra cash to pay above the minimum required payment on debts with high interest rates. As a result, you will save more money long-term because you reduce the amount of time a high interest rate can accrue.
To use either of these methods successfully, you will have to maintain a continuous discretionary income to pay extra each month.
Consolidate or Refinance Your Loan
If you don’t feel your personal financial situation will allow for either of these debt repayment methods, you may want to consider changing your loan structure altogether. For example, a debt consolidation loan or refinance loan can change the terms of your debt to help you transform your debt repayment timeline.
Loan consolidation combines different debts from various lenders into one simple monthly payment. This means you don’t have to choose between a low balance or high interest rate when prioritizing your payments. It’s also an excellent opportunity to find a lower monthly payment or lower interest rate.
If you don’t want to combine your debts, you could still consider a refinance. Student loans, mortgages, and auto loans can easily be refinanced for a lower interest rate or lower monthly payments, depending on your credit score.
BrightUp Can Help You Payoff Your Loan Faster
If you really want to change how long it will take you to pay off your loan, you don’t have to figure it out all by yourself. Forming habits and staying on track can take a lot of effort, especially if you’re busy keeping up with your job and household. But, if you’re determined, there are resources that can help you change your mindset and spending habits.
Compassionate Capital
If you feel that loan consolidation is the best path for you, BrightUp can help! Our loans are centered around providing compassionate capital. We use an alternative underwriting algorithm to expand access to affordable rates for employees with a wider range of credit scores.
Over 90% of financial institutions rely on FICO scores, yet those scores do not have a strong correlation with predicting loan defaults when credit scores are below 660. Our alternative score brightens and expands access to fairly priced credit.
BrightUp Financial Calculators
Beyond access to fairly priced capital, the BrightUp app helps users save for goals, track their net worth, learn about investing, and more. With the Valculator™, named after Chief Visionary Officer and Growth Guru, Val Mosley, you can understand how that $1,000 you’ve saved on interest can compound to millions in just a few years. You can also watch your net worth grow using the net worth calculator.
Financial Coaching
Even with access to loans with reasonable terms and financial planning tools, we realize that some may still want to rely on the expertise of a financial advisor.
Historically, financial advisors have been exclusive to clients who make more than $100,000 a year. But studies show that financial coaching sessions can increase 57% of employees’ Financial Capability Score (FCS).
The more sessions a client attends, the more their FCS increases. With BrightUp, employees get the benefits of a high-brow financial advisor through text-based support on financial topics and phone-based financial coaches who will help you set and meet your goals.
Everyone deserves the chance to access the tools they need to get out of debt faster. BrightUp partners with employers to provide financial benefits like access to capital, financial planning, personalized financial education, and coaching from experts. If you believe our programs could benefit your workplace, contact a BrightUp Representative.
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