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How to pay off debt faster

Apr 13 2015 12:35

A Fin24 user asks: What is the best option to pay off my car loan faster?

Independent debt counsellors Renée Marais and Hennie Vermaas respond:

The best way to pay off your debt more quickly is to start paying more than your required monthly instalment every month. You can for example pay the contractual amount required at the usual time and later in the month when you are able to, pay in more money.

If you pay just a small amount per month more into the vehicle finance account the difference at the end will be astonishing. It has a direct effect on the interest calculated on the outstanding debt.

Another way is to have a savings account where you put away funds until you have a substantial amount and then use that to pay off some of the outstanding debt and renegotiate with the bank for a new repayment arrangement.

The creditors may baulk at this offer as it will mean less money for them and some might have conditions on the original credit agreement to this fact.

What you need to do is to read your original contract and see what conditions there are on earlier settlement of the debt.  

Food for thought

Vermaas, who has written a book to help people manage their income and expenditure, says any additional payment make a massive difference.

To illustrate the difference any additional payments can make and where consumers could possibly free up cash, Vermaas focuses on smoking and home loans.

"For my book, I used an example of expenses and asked a few questions like the items below - question and standard responses."

On expenses

Do you smoke? Yes

How many cigarettes per day? 20

Do you know what it is costing you per month?  No

Do you know what it is costing you per year?  No

Monthly cost = R 1 064.58; Yearly cost = R 12 775.00

On increased home loan instalments

Do you know that if you make additional payment on your home loan account what the impact will be over a long term?  No

Now for the real stuff.

On a home loan of R500 000 at 10.5% interest over a period of 30 years, if you make additional payments this will be the effect:

  • R1 per month extra = 1 instalment less to pay
  • R10 per month extra = 8 instalments less to pay
  • R100 per month extra = 4 years of instalments less to pay
  • R1000 per month extra = a saving of R1.2m in interest over the term of the loan and you can pay the loan in full in less than 15 years.

"Now for the funny side of it. The question/statement is simple. I am not asking you to stop smoking at all but do you realise that if you smoke 5 cigarettes less per day you can actually pay R266.15 per month extra on your home loan, i.e. 8 years of instalments shaved off the home loan repayments."


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vehicle finance  |  money  |  money clinic  |  debt


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