Long-term loans are usually loans with a term of five years or more. Sometimes it can seem as if your long-loan just isn’t decreasing or will never come to an end. Fortunately there are a few ways to pay it off sooner.
1. PAY ANY EXTRA MONEY YOU MIGHT HAVE INTO THE LOAN
Try to pay more than your minimum loan-repayment amount every month. Even if you can’t pay the same extra amount every month, any additional money will make a difference to the interest you end up paying and the duration of your loan.
You can use part of your bonus, for example, or money you earn via an extra income.
- The difference such extra payments can make is often more significant than you think.
Here are some examples:
You still have 10 years (120 months) left on your home loan and owe R500 000. Your interest rate is 10%. The interest you’ll pay on this amount by the end of the 10 years will be R292 904.
This is without taking into account additional service fees. If you pay a once-off additional amount of R10 000 on your loan this month, you’ll pay R16 500 less in interest and shorten your loan term by four months.
If you pay a once-off amount of R20 000, the loan term will shrink by seven months and you’ll be charged R32 000 less in interest.
If you pay just R200 more than your minimum repayment every month, you’ll save more than R16 000 in interest, and shorten your loan term by five months.
If you pay R500 more every month, your saving in interest is more than R37 000 and you’ll pay off the loan 13 months sooner.
The larger the additional monthly payment, the larger the amount you’ll end up saving in interest.
- Ideas for extra income:
If you’re wondering where to find additional money to put into your loan, take a look at your regular expenses such as home and car insurance, life or funeral cover, internet or your cellphone.
Get quotes from various suppliers. Don’t just accept the cheaper quotation per se – make sure it will give you a comparable service or product.
Also make sure there are no cancellation fees, particularly on cellphone contracts. Even if you don’t want to change suppliers, get quotes and if they’re lower you could ask your current supplier if it’s prepared to adjust its rate.
Remember to notify your bank when you terminate service contracts so it doesn’t pay out expired debit orders.
You can also consider selling things online. Take a look at Gumtree, Facebook’s Marketplace and websites such as Yaga.co.za where you can sell items such as second-hand clothing.
These are usually paid for via EFT or cash in hand. If it’s via EFT, wait until the deposit shows in your account before handing over an item.
2. DON’T SKIP PAYMENTS
There are various negative consequences:
- You’ll fall behind with your repayments and then the interest becomes more and the loan term longer.
- You might be charged a fine.
- If your debit order bounces, you also have to pay the bank fees.
- You could get branded a bad payer, which in the long term means you won’t be able to get loans easily and on good terms.
Save in advance to ensure you have money available during those months when expenses are high – typical pitfall times include the December holidays and January school expenses.
If you can’t afford your repayments, it’s another matter altogether. You should immediately take it up with the lender, who might grant you a payment holiday, which means that for a particular period you won’t make repayments.
Your interest will grow and the loan term will become longer, but you won’t have to pay fines or be tagged as a bad payer on your credit record.
3. DON’T EXTEND YOUR LOAN TERM
People easily fall into the trap of extending their loan term because it means smaller monthly repayments.
But the longer you take to pay off your loan, the more expensive the loan becomes. For example, if you have a personal loan of R150 000 you want to pay off over four years (48 months) at an interest rate of 24,5% (the interest rates on personal loans are significantly higher than the rates charged on home loans) you’ll pay R5 144 a month.
The total loan including interest will cost you R246 900. If you want to reduce your monthly repayment and increase the loan term to six years, you’ll pay about R4 180 month – but the loan will end up costing you about R301 000.
4. YOU CAN MOVE YOUR LOAN TO A LENDER OFFERING A BETTER INTEREST RATE
But you must make sure it’s really a better option, so ask to see all the costs involved in the loan for the remainder of the term.
Then compare all fees, including initiation fees, service fees and insurance. You have a right to know exactly what fees you’re being charged.
GET MORE ADVICE
- Money management tips on the websites of financial services groups such as oldmutual.com
- Consumer money matters: www.fscamymoney.co.za
- The National Credit Regulator: ncr.org.za or 0860-627-627