Should you repay your loans faster?

When you take out a long term loan there usually is a contract that states how much money in monthly payments you will have to pay. Depending on the credit amount and those payment sizes you can have a repay schedule that can last from a few months to multiple decades. And we, consumers, have gotten used to paying only those minimal monthly payments but the fact is that those lenders usually create these monthly payment schedules to maximize their income from those interest rates and the longer you have to pay the more money they extract from you. If you get a long term loan that lasts 10 to 20 years then in the course of that debt repayment you can pay in interest almost as much as the actual loanable funds. That is why many people when they realize this start to think about various methods how to minimize their losses and the easiest usually is to pay your debt faster and each month make larger payments not just the minimum.

Interest on loans usually is calculated from the remaining amount and that means at first interest payments will be much larger but later on they will become smaller and smaller as that initial loan is proportionally paid off. And if you invest money into paying back your loans faster you ultimately get less interest payments. That is why financial planners usually advise their customers to first repay their debt and only then think about any other investments because by investing money in your debt repayment you can easily get a return of 4% to 10% depending on the interest rate that your lender asks from you.

People usually tend to underestimate the magnitude that these faster payments can bring them because when you have a debt of 10000 Lari then paying 50 or 70 Lari each month seems to not make any difference. But when you do the calculations then by paying 50 Lari each month you will have to pay for more than 16 years but by paying 70 Lari each month that time is reduced to about 12 years. And that is not counting on the interest that will accumulate on that loan that you will also have to pay on top of that monthly payment. When you make calculations like these then you can understand that even small differences can make big changes and create a so called avalanche effect when a small snow flake can later create a massive snowfall. And in the case of debt repayments when you pay more than the minimum you can reduce the total loan term and save a lot of money that you will be able to use for other purposes.

Of course that does not mean that you have to stop spending cash and put everything into repaying your debt but that just implies that you can save a lot of money when you create small changes in your budget. But be sure to check your loan agreement because there can be cases where the lender has put in a paragraph where if the loan is repaid earlier the lender can get a penalty payment from the client. These cases are rear but they do happen so better be careful than pay extra!