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Accelerated Debt-reduction Plans

Extra Principal: Paying extra principal is the key to getting out of debt more quickly. An extremely convenient way to do so is to pay 1/2 of your regularly scheduled monthly payment bi-weekly–that is if your lender accepts bi-weekly payments and posts the extra money paid so it reduces you balance–and you get paid bi-weekly. If your lender doesn’t accept bi-weekly payments (and some lenders don’t, especially mortgage lenders), or if you don’t get paid bi-weekly, you can accomplish the same advantage by paying the equivalent of 13 full payments in 12 months (your full payment plus 1/12 of your full payment–as extra principal–each month). Of course, if you pay more, you’ll get out of debt more quickly. Make sure you make extra principal payments in the manner that your lender prescribes. Make sure your lender uses that extra amount to reduce your principal loan balance, and that the resulting interest charged is thereby reduced (lower balance should yield lower interest charged and paid). Make sure there aren’t any pre-payment penalties or restrictions.

This Excel spreadsheet: Bi-weekly vs Monthly can be used to compare the differences between paying bio-weekly and the equivalent amount monthly. Note that if one pays the equivalent of 13 monthly payments each year, it doesn’t make a significant difference if it is paid bi-weekly or monthly. Of course, if you pay larger amounts of principal, your advantage will be even greater–you’ll end up paying much less interest (if your lender calculates and posts interest based on your reduced balance).

Accelerated Debt-Reduction Plans: A PowerPoint slideshow to help people get out of debt more quickly.

 

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