How to Pay Off Debt Early and Save Money

Pencil eraser erasing the word debt
Photo: Michael Phillips / E+ / Getty Images

You can save a lot of money if you pay off your debts quickly. For many people, the motivation is there, and they understand why it's important to eliminate debt. It's often just a matter of logistics.

There are several simple methods to pay down your loans. Before you choose one, make sure you understand how to pay off debt early with any particular lender you're using. There may be pre-payment fees or specific steps required for that lender to credit things properly.

Does It Make Sense to Pay Off Loans Early?

Sometimes, it's a great idea to pay off debt, and sometimes there are better options.

Good reasons to pay off debt early include paying less interest and having that money to save for future financial goals and investment. Make sure you have enough in your emergency cash fund before speeding up payments. In some cases, a loan's interest rates might be so low it makes no sense to accelerate.

Some people just like the feeling of being debt-free. The money to prepay the low-interest debt can work harder if it is invested in financial instruments or alternative investments like real estate, with expected returns higher than the loan's interest rate.

It's always a good idea to run some numbers and figure out how much you'll save—and possibly get even more motivated. See how things will work with a loan amortization calculator, use a pre-built Excel loan calculator, or calculate loans manually on your own.

Just Send Money

The simplest way to pay off debt early is to pay a little—or a lot—more whenever you can. It’s also the hardest to pull off, since it requires discipline. You may want to consider using an automated technique if you don’t think you’ll stick to the plan.

If you like to fly by the seat of your pants and are confident that you can pay off debts on your own, just send extra payments. Include a note with your check, saying, "Apply to the principal" in the memo line. That way, your lender won’t get confused; they’ll know that you’re trying to pay extra, and they can contact you if anything needs to be done differently. Check in after the first two or three payments to be sure your instructions were understood and are being followed.


The same concept applies to electronic payments, which typically have a place to include a note about your intentions.

Make One Extra Payment

You’ll pay off loans more quickly by adding an extra monthly payment each year. If your monthly payment is $1,200, then pay an extra $1,200 sometime during the year. You might use money from a tax refund or bonus.

If you’re like most people, it can be hard to come up with the additional payment. One alternative is to spread the extra payment out over the entire year. Divide your monthly payment by 12, and add that amount to each monthly payment. Your $1,200 payment will become a $1,300 payment (1,200 divided by 12 = 100; 100 + 1,200 = 1,300).

Pay Off Debt With Biweekly Payments

You can also pay off your debt by paying every two weeks instead of every month. You’ll end up making the equivalent of one extra payment each year. When you pay off debt with a biweekly payment, you shouldn’t see a dramatic change to your monthly expenses. However, you’ll see dramatic savings as you pay off the debt over the years, because you'll be reducing the amount of interest.

Lender Programs to Pay Off Debt

Your lender may have several options to help you pay off debt more quickly. These programs may require you to pay additional fees, so be careful. If it’s worth it to you, go ahead and pay the fees. If you don’t like the fees, find a way to pay extra while avoiding the fees. You might set up automatic monthly payments in your bank’s online bill pay system. Be sure you include a note saying, "Apply to the principal."

Other companies, besides your lender, will also gladly take a fee for a debt-payoff program. They sell software programs and systems to handle everything for you (or at least tell you what to do). You generally don’t need these services unless they’ll help solve a discipline problem.

If you’re not getting it done any other way, do whatever works—but make sure you save more than you spend.

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