A lot of times people take out loans to pay for something that they can’t immediately afford. This allows people to purchase a product or service that they wouldn’t be able to obtain without financing. The problem with loans is that they can take a long time to pay off. You need to have a payment plan to make strides towards becoming free of that debt.
But how long will it take you? Well, this depends on several factors. Let’s discuss.
Why Do People Take Out Loans?
There are a lot of reasons people borrow money. Here are some of the most common ones.
- Making a large purchase might require a loan. This could be a car, a house, or even new appliances. Taking out a loan makes it possible to afford new items without having all the money upfront.
- A lot of people take out loans to consolidate their debt. If they have multiple credit cards they may want to combine them into one payment. This can be done through a personal loan that might offer better interest.
- People also take out loans to start home improvement projects. If you want to redo your kitchen but you don’t have $15,000 extra in your bank account, some people may choose to take out a loan and then pay it off later.
- Some of the biggest unexpected bills in a person’s life can be medical bills. In the case of an emergency, these bills happen fast and you do not have time to save up for them. Things like car accidents and heart attacks can cost a lot of money in hospital expenses. A loan could help someone pay the hospital right away and pay the rest of their debt over time.
- One of the most common reasons someone takes out a loan is for attending college. This is a huge expense and financial aid doesn’t always cover it all. This is one of the longest types of loans to pay off because it is usually such a large amount.
Should You Have More Than One Loan At A Time?
Most people have more than one loan at a time. The average person has a car payment, a mortgage, and student loans to pay off. You should be careful when adding additional loans on top of your existing ones because it can create a much bigger financial burden.
A lot of lenders will limit the number of loans that they will give you at once. They may also limit how much money they will give you at a time as well. If you are looking for multiple loans, you might want to consider looking into other lenders besides the one you already have.
However, remember that every lender has access to your credit report and will be able to see that you have other loans open already, as well as your repayment history and any accounts that have defaulted or gone to collections. There is no way to hide this information from lenders because they are legally entitled to see it before offering you money. Some lenders will also require you to make a certain number of payments towards your current loan before applying for a new one.
How To Calculate The Amount of Time It Will Take To Pay Off Your Loan
Most loans come with a certain amount of time that you need to pay them off, called the loan term. You can always pay more than the minimum required and doing this will allow you to pay the loan off a lot quicker.
To find out how long it will take you, you need to determine your interest periodically, the total amount that you owe, and your monthly payment. There is a complicated formula for finding this out for yourself, but if you don’t want to do that, there are plenty of online calculators for this.
You would simply plug in the numbers to the correct box and it will tell you how many months/years it would take you to pay off your loan. This would also depend on if your loan has a fixed or variable interest rate.
What is APR?
When you are evaluating a loan, you have to look at the interest rate and the APR. These two terms are similar but have slightly different technical definitions. Your interest rate is the advertised rate of interest on your loan. This is the cost of borrowing the principal amount.
The APR is the interest rate plus other costs that have to do with the loan. This would include the fees that you pay and the closing costs, and rebates. The APR is also expressed as a percentage, just like the interest rate. These costs are spread out for the entire length of the loan. Your APR is a more accurate representation of how much it will cost you to borrow money.
Fixed vs. Variable Interest
Another factor that may contribute to how long your loan takes to pay off is what kind of interest you have. There are two types of interest: fixed and variable.
When you have a fixed rate, the interest rate does not increase at all during the length of your loan. This means that the market will not affect the rate of your loan and whatever you agreed upon initially is what it will stay at.
A variable interest loan is subject to change. These types of loans generally have lower interest rates than fixed-interest loans, but they have a lot more risk for the borrower. If you are going to try to pay your loan off quickly, you may want to opt for a variable interest loan. The margin for your rate can depend on your credit score and your lender. If you are taking out a riskier loan, the margin will be higher. There are advantages and disadvantages to both of these types of loans.
Factors That Contribute To Rate
The factors that affect your loan are directly related to the rate that you got for your loan. The rate that a lender gives you is directly dependent on your credit score, amongst other things.
- Your credit history
- Your employment and your income
- How much money you are asking for
- The length of the loan term
- Other loans that you currently have
- How frequently you plan on paying the loan
- If you have any co-borrowers
- Your assets
All of these things will determine the rate that the lender gives you. In turn, this will affect how long it takes you to pay it off because the bigger the loan, the longer it will take.
Steps To Paying Off A Loan Quickly
If you are looking to pay off your loan sooner than when the term ends, there are a couple of ways to do this. If you can, round your payments up every month. Do this every time you can afford to do so. Even an extra $50 can help shorten your loan in the long-run.
You can also make payments more frequently. Instead of making monthly payments, try making bi-weekly payments instead. You could also just make an extra payment every quarter or every year if that is more doable for you.
Another option is to refinance your loan. If you are unhappy with the current interest rate that you have on your loan, you can refinance it through a different company. There might be some fees involved with this but it could be worth it in the long run.
One thing to be aware of are prepayment penalties — some lenders actually charge you extra for paying off your loan early, so make sure to check for this if you are considering paying off the whole thing.
How long it take to pay off a loan is up to you and the loan terms, but the sooner you can pay it, the better.
If you only make the minimum payments and opt for the longest loan term possible, you’ll be making payments for a long time.
If you focus on making your loan a priority to pay off, you can be free of the burden. This will leave you free to pursue other financial ventures, like investing. Remember to pay more than the minimum and make budget cuts where necessary. Good luck!