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If Scrooge's lament
sounds strangely familiar to you, perhaps you've had occasion to regret
the amount of your lifestyle that goes to pay interest on loans.
Nobody likes to pay
interest, but chances are, unless you were born very, very rich or very,
very poor, you are currently paying interest to someone on a loan
for something..
We don't need to beat
ourselves up over that. Because, without borrowed money, how many
of us would have an education? How many would have a vehicle that
starts every morning? How many would have a home or a homestead?
Interest is the penalty
that we pay for not being very, very wealthy or very, very destitute.
Having accepted that
trauma, we can move on to ask ourselves what can be done to minimize our
exposure, and as luck would have it, there are a few ways to make it
easier to pay most any note off in reduced time at less expense and
without adding too great a financial burden. I'm going to show you
three.
That's not to say that
the methods I'm about to demonstrate are any sort of free lunch, they
aren't. You pay interest for the use of someone else's money and
these techniques work because you "rent" less of their money for a
shorter period of time.
Here are three ways to
accelerate the payment of almost any amortized loan (some lenders
don't allow you to make pre-payment) and each one is designed to reduce
your interest charges and have your note paid off as soon as possible in
a manner that has the least negative impact on your lifestyle.
Interest is the rent
you pay for the use of other people’s money. None of these
strategies amounts to a free lunch; that is you have to pay greater
payments in order to lower interest costs and get your note paid off
sooner. However, these are proven strategies that many people have
used with success and you can too.
All of the examples
I’ve provided here are based on a typical 15-year loan of $10,000
bearing annual interest at the rate of 9% per year (per annum).
[To manage your interest payments, you’ll need an amortization schedule.
You can probably find one at one of the advertising links on the right
side of this page or I've made a simple schedule in MS Excel that you
can
download here.]
Here’s what an
amortization schedule for our typical loan will look like:
In the top part of the
window, you see the total amount borrowed, $10,000, and the computations
for principle and interest are figured with each successive payment.
Notice that the first month, when you make your first payment of
$101.50, only $26.50 of your payment goes toward your equity, that is to
decrease your debt, and the rest, about 75%, goes to interest.
Note that this situation gets progressively better with each succeeding
payment so that fifteen years later, at the end of the loan (the bottom
part of the window) almost all the payment goes toward equity with
almost none of it going to interest.
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