FINANCES: Early Principal Reductions on Loans

1 Corinthians 10:13

No temptation has overtaken you but such as is common to man; and God is faithful, who will not allow you to be tempted beyond what you are able, but with the temptation will provide the way of escape also, so that you will be able to endure it.

Here is my best tip for any type of financial debt whether it be credit card debt, car loans, home mortgage or whatever. Always pay more than the minimum payment. Study your budget and do your best to set aside a specific amount each week to make an additional principal reduction at the end of the month. The minimum payment of any loan is usually made up primarily of interest with a smaller amount paying down the actual balance of your debt. The goal is to pay this balance down as quickly as possible.

To illustrate:

Say you have a credit card balance of $5,000 @ 18% annual interest rate. The minimum payment required is $100/month. It will take you almost 8 years to pay off this debt and you would have paid over $4,300 in interest, making the $5,000 purchase into a $9,300 payback amount. On the other hand, if you add an additional $50 per month ($12.50 per week) to your loan payment, thereby making a $150 monthly payment on this same debt, it would take less than 4 years to pay it off, with under $2,000 in interest charges, a savings of more than $2,300 in interest. These amounts were calculated using Crown Ministries' Credit Card Minimum Payment Interest Calculator.

Or consider your home mortgage loan. For a mortgage of $125,000 @ 6% interest over 30 years, interest payments would be almost $145,000 making the total debt repaid almost $270,000. If, on the other hand, you make an additional $100 payment each month, the interest would be about $102,000 with the total debt $227,000, a savings of $43,000 and about 8 years less of payments! These amounts were calculated using Crown Ministries' Mortgage Prepayment Calculator.

As I've said before, the Miracle of Compound Interest truly is amazing and works both ways--to your benefit if you pay a little more; to the lender's benefit if you pay the minimum or less.