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Josh’s Debt Story (Part 1): Making Extra Loan Payments

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Josh’s Debt Story (Part 1): Making Extra Loan Payments

I graduated from college with $50,000 in student loans & also borrowed $27,000 a few years later to buy my dream car. No matter who you are, $77,000 in loans is a lot of money to borrow and payback. And I was able to do it in 5 years. In this series of articles, I will tell you about my debt story and how I was able to get out of debt so soon.

My Debt History

Before I tell you how I paid off my loans, allow me a moment to tell you how & when I acquired this debt and my current financial situation.

Firstly, I graduated from college in 2008 and hired on in the transportation industry as an operations supervisor earning $50,000 a year and living in a relatively low-cost of living area. My dream job was to work for the FBI, but, after realizing I would have to most likely live in an expensive metropolitan area for my desired career path, I soon switched plans because I knew I would be struggling to repay my loans & build a personal life in the big city unless I wanted to share an apartment with 5 others.

No thank you. While I still talk to my college roommates to this day, I knew I was ready to have my own place. This meant finding a job & moving to a place that allowed me to afford rent and my other bills.

By taking the job I did, I knew I could afford my student loan payments and accomplish my goal of repaying them within 5 years, instead of the standard 10-year repayment term. In fact, I paid off my student loans in 3 years right before Christmas. As a present to myself, I bought my dream car a Ford Mustang GT and borrowed $27,000 to cover the difference.

I was able to repay the balance in two years (5 years in debt) and was debt-free for two years until we decided to build a house & financed the project with a mortgage. Currently, we have a 15-year mortgage, but, we are on track to repay the balance in 7 years (January 2024) through a combination of making extra loan payments & saving for the future, success tips I will discuss in my story.

Success Tip #1: Make Extra Loan Payments

Regardless of what type of debt you currently have, be it credit card, medical, home mortgage, student loans, car loans, etc., the first step to becoming debt-free is to live within your means by spending less than you earn and using a portion of the extra cash savings to make extra payments on your loans.

Yes, making the minimum monthly payment will eventually pay off the loan and not harm your credit score, but, you are essentially giving the bank free money in the form of interest payments.

I don’t like giving “free” money to the bank

Take a look at your monthly loan statement. It should tell you how much of your most recent monthly payment was applied to interest & the principal. If your loan is still relatively new, a large portion of your monthly payment is going to interest that accrues each month & the remainder actually goes to reduce the amount you initially borrowed.

Interest is what can make your original credit card bill of $870 actually cost $1,200 if you only make the minimum payment of $25 each month for four years. The more you borrow, the larger the accrued interest is. The bank is happy because it’s more money for them, but, it means less money in your pocket long-term.

I made extra payments whenever possible

The quickest way to become debt-free is to pay your balance off as soon as possible as lenders will apply any extra payment to the principal. Even by contributing an extra $50 per month to a loan can make a big difference. In one year, that’s $600 extra dollars that’s been applied to the principal and $600 fewer dollars that accrue interest each year.

My goal was to make an extra monthly payment each month. If the regular payment was $300, I would try and do $600 instead. Some months I couldn’t because of other large expenses like having to get new car tires, etc. Whenever I had extra income, from a pay raise or annual bonus, I immediately gave the extra money to the lender. This allowed me to pay my loans off in 3 years instead of 5 years.

What Loan Should You Payoff First?

If you have more than one loan to pay back, you might be deciding which to repay first. There are two different repayment strategies that you can choose from.

The debt snowball method is when you pay your smallest loan balance back first. This is best if you like “small victories” as you make the minimum payment on all your other loans, but, give all your extra money to your smallest loan. Once that is repaid, you then focus on the next smallest.

Example: If you have a $500 loan with 5% interest, $5,000 loan with 3% interest, and $2,000 loan with 15% interest, you would repay the $500 loan first then the $2,000 loan.

My favorite, the debt avalanche method, is attacking the loan with the highest interest rate first. This is because you pay off the loan with the highest interest rate first. In most instances, this method will save you more money because higher interest rates often mean more interest paid overall.

Example: Using the same loan balances from the previous example, we would pay the $2,000 balance off first because it has the highest interest rate, followed by the $5,000 loan because it has the second highest interest rate.

Success Tip #2: Use a Debt Payoff Calculator

Finally, for you visual learners, use a debt payoff calculator to see how much sooner you can repay your loans by making an extra payment each month. You might be surprised by how much you can save. I have used these calculators for every type of loan I have had & can think of so many different ways to spend the money instead of giving it to the bank when I know I can afford to repay the loan early.

Summary

Make it a goal to pay more than the minimum payment for at least one of your loans, even if it’s only $50 extra a month. You will still save money long-term and get out of debt sooner.

Use a calculator to see just how much it is possible to save by contributing an extra $50, $100, or even doubling your payment & also how many fewer months it will take to repay your balance.

I had a goal to repay my loans as quick as possible and the only way to do that is through extra payments.

What are your financial goals?

Check out 

Josh’s Debt Story (Part 2):

Josh’s Debt Story (Part 3):

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