Most people have many monthly expenses like rent or mortgage, utilities, and groceries. That’s why many find it tempting to only pay the minimum balance due on credit card balances and loan obligations. However, by paying more than the minimum, they’d save money on interest, reduce the repayment time, improve their credit, and probably gain much-needed peace of mind.
Below we’ll dive deeper into what happens when borrowers pay just the minimum amount each month, and we’ll look at debt payoff strategies, like debt consolidation, debt snowball, and debt avalanche.
Interest is the price borrowers pay to borrow money. By paying just the minimum, most of the monthly payment goes toward paying interest charges. On the flip side, by paying more than the minimum, the balance can be reduced by a larger amount in a shorter period of time and end up saving hundreds or even thousands of dollars in interest charges, depending on the loan type, the annual percentage rate (APR) and total outstanding balance.
By making just minimum monthly payments, it can take years or, depending on its size, even decades to pay off debt. To become debt free sooner rather than later, borrowers should try paying more toward their credit card and loan payments each month. Once a debt is paid off, there’s more money to put toward a down payment for a house or car, to fund an emergency fund, or save for school or retirement.
When lenders review a borrower’s application for a loan or credit card, they consider the amount of debt the borrower already has. Lenders might hesitate to lend to someone with a lot of debt because that borrower may be more likely to default on their payments. By paying more than the minimum and freeing up their debt load, borrowers often find it easier to qualify for financing in the future.
When a borrower is ready to pay off debt, here are some methods to consider:
Borrowers can save money and focus on their financial needs and goals by paying more than minimum monthly payments. Paying more than the minimum each month can help alleviate financial stress and with the right strategies in place get the borrower closer to the debt-free lifestyle they deserve.
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.