Hack the loan: Payoff your loans in half the time!!

"Debt is like a thief that steals your financial freedom. Pay it off as fast as you can."

If you have a home loan or any other type of loan, you know the pressure that comes with monthly payments and interest payments over the duration of the loan. Today, I want to share with you methods to significantly reduce the duration of your loans and the amount of interest you pay.

We will be covering three main topics:

1. How your monthly payments are structured?
2. How the tenure of your loan affects the total amount of interest you pay?
3. 3 Tips to payoff your loans faster and significantly reduce the amount of interest paid without adding additional stress or financial risk.

How your monthly payments are structured?

The first thing to understand is how monthly payments are structured. Monthly payments have two parts: the part that goes towards the principal (the original loan amount) and the part that goes towards paying off the interest. A lot of people assume that there is a 50/50 split, but this is not true. In the earlier parts of your loan, a majority of your payments go towards paying off the interest and not the principal. By understanding this principle, you can reduce the duration of your loan.

For example, let's consider a hypothetical loan of $210,430 at a 7% interest rate for 30 years, with a monthly payment of $1,400. The total interest paid on this loan over the 30-year duration is $293,000.

To help you understand the payments breakdown, I have created a visual example below for it. In the first year, only $2,100 out of the $16,800 paid goes towards the principal, while the rest goes towards paying the interest. This means that at the end of year one, you still have a loan of $208,000 to pay off.

How tenure affects your loan?

The tenure of your loan also affects the amount of interest you pay. For example, if we change the 30-year loan to a 15-year loan, the interest paid would be lower. Lower duration loans also usually have lower interest rate. With a 15-year loan of $210,430 at 6% interest, the monthly payments would increase to $1,775, but the total interest paid would decrease to $109,000, thereby saving you $184,000 compared to a 30 year loan.

So, the key to reducing the duration of your loan and the amount of interest paid is to focus on reducing the remaining principal as fast as possible. The interest payments will also decrease as a result.

3 Tips to payoff your loans faster

1. Make additional payments when possible: If you have some extra money in your budget each month, consider using it to make additional payments on your debt. For example, if you usually pay $300 per month, try adding an extra $50 or $100 to your payment. This will help reduce the amount of interest you pay over time and get you out of debt faster.
2. Take advantage of your bonuses: If you receive a bonus at work, consider using some or all of it to make an extra payment on your debt. For example, if you receive a $1,000 bonus, use $500 of it to pay off your debt and keep the rest for yourself.
3. Increase your payments in line with salary increases: As you receive salary increases, consider increasing your debt payments as well. For example, if your salary increases by 3% each year, increase your debt payments by the same amount. This will help you keep up with the increasing cost of living and get you out of debt faster.

By using a combination of the above three techniques. $100 extra per month, $500 extra per year from bonus and a 4% increase annually in your loan payment, you will be able to payoff your 30 year loan in 14 years and 9 months and save $151,000 dollars in interest.

Here is the excel sheet that I have used for this article and a video I made on this topic. Feel free to download it and play around with it to understand how you too can payoff your loan significantly faster without taking on additional financial risk or stresses.

Below is the video I made on this topic for a more detailed explanation.

In conclusion, paying off your loans faster requires you to understand how your loan and monthly payments are structured. Using the strategies such as making additional payments (monthly or annually) and increasing your payments per year as your income increases you too can achieve financial freedom and get out of debt faster.

Spreading Financial Literacy

Do you ever wonder why so many people struggle with debt and never seem to be able to break free in India? Is it because of inadequate financial literacy or something else? To reach a broader audience in India and spread financial literacy, I recorded the above video in Hindi too. It is designed to educate and empower anyone who wants to become debt-free. So, don't keep this knowledge to yourself, share it with your friends and family who may also benefit from it. Let's work together towards a brighter financial future for all.

Here is the excel sheet with Indian Rupee as the currency and using Indian denominations such as Lakh and Crore.

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