How to get the best out of student loan depreciation
Depreciation cannot be completely avoided, since all the installment loans work this way. However, if you stick to a strategic repayment plan, you can maximize the amount of the principal amount and begin to increase your balance.
Regardless of whether you have negative depreciation or normal, ordinary depreciation, the best way to reduce the amount of interest charged is to pay extra for student loans – as much as you can, as often as you can.
Here are some things to consider when making additional payments:
1. Make additional payments using the “debt avalanche” method.
According to this method, you pay at least on all balances, except for the one that has the highest interest rate. Any money that you have in your budget for additional payments, as well as any unforeseen expenses, should be directed to this highest interest balance.
Since your additional payments will be directed to the principal amount, and the amount of interest charged depends on your principal balance, the avalanche debt method is the best method to reduce the amount of interest you pay during the term of the loan.
Check out this prepaid calculator to see the effect it can have on your loans.
2. Indicate that additional payments should apply to the principal amount of the loan you are assigning.
Sometimes lenders will apply additional payments to the payment in the next month (read: interest in the next month) instead of the principal amount. In addition, if you have several loans with one service agent, they may also apply an additional payment to the loan of their choice, and not to the one you are targeting.
Include a note in the appropriate field of your online payment or physical check, then double check that your payment was applied as instructed, and contact your service personnel for corrections if necessary.
3. Refinancing at a lower interest rate.
The lower the interest rate, the more your monthly payment goes on the principal amount and the faster you return your loans – even in those months when you cannot make additional payments for one reason or another.
Be careful when refinancing; for example, if you currently have federal loans, you can opt out of benefits such as access to deferment, patience, or options to pay income if you refinance with a private lender. However, since refinancing lenders offer rates of 1.9%, as they do today, the money you save can be used to get out of debt more quickly.
Depreciation is not your friend, but you can beat it!
Although there is nothing funny in that part of your hard-earned student loan payments goes in the direction of interest, understanding the process can make it less intimidating. And as soon as you act out of logic, and not out of fear, you are in a better position to develop a strategy for the best method of depreciation – and debt on the student loan as a whole – once and for all behind you.
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