Paying more than the minimum amount due on an installment loan, like an automobile loan or a mortgage, saves on interest expenses in the long run. You owe the money for less time, and hence pay less interest. There are of course lots of ways to pay down loans more quickly. There’s something for everybody who wants to be debt-free. We’re planning to pay down our debts faster after getting a decent emergency fund.
The flip side of paying off debts faster than required by the lender agreement, though, is that the extra money paid toward the debts are then unavailable for other use. The extra money pays down the balance faster, but you can’t take it out after you’ve done that (at least not easily).
However, what if you see leaner times in your future? That’s what many federal employees are looking at now that sequestration has gone into effect. Furloughs are a little over a month away for many. For some of the hardest hit, it could amount to more than two full biweekly paychecks. This is thousands of dollars.
When looking at this loss of income, there is an easy way to save more if you’re already on an accelerated debt repayment plan. That’s simply to go back to paying the minimum on those loans until things get better.
Paying just the minimum on debts does make them stick around longer. That’s the cost. But it does accomplish two things:
- It still keeps creditors happy. In fact, it probably will make them happier! The payments are still coming in, on time. They’re being paid what they require: the minimum. They’re extracting the maximum amount of interest out of you again. Your credit rating will stay where it is, or improve.
- It decreases expenses. Less money going out to debt means more money in the checking account. If you actually have a *need* for the money — as you might during a time of partial layoff — it will be good to have it there.
Now, it certainly is far preferable to cut other areas of consumption first in order to re-normalize the budget — like postponing vacations, eating out less, or doing a targeted no-spend month. If doing these things, and other things, gets you where you need to be with the smaller budget, then there’s no need to pay down debts any slower than you are.
But if the months are just a bit too long for the smaller paychecks, then dialing down the rate at which you’re paying down debt — temporarily — can help. It will reduce the chance that you’ll need to take on more debt during the lean times.