Paying down your debt can be a long and tortuous process. Making those monthly payments month in and month out, especially if your debt load is large, can make it seem like you are never going to get to the end of them and call yourself debt free.
But there are plenty of ways to speed up the debt repayment process. You could make extra monthly or even weekly payments, you could negotiate for a lower interest rate, or you could make lump sum payments.
A lump sum payment is a large payment that you make on your debt. Below are tips on how to make a lump sum payment, the effect it will have on your debt, and why it’s a great way to slay your debt monster quicker.
Paying off debt with lump sum payments
You may think you don’t have the money for a lump sum payment, but with a little resourcefulness, there are many possible sources of money for extra payments. The money could come from anywhere. You could sell your car and use the proceeds. You could dedicate your income tax return to your debt. You might receive an insurance settlement or inheritance. All of these sources for a lump sum payment will yield several thousands of dollars.
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How lump sum payments can help you pay down debt faster
Putting a lump sum payment on your debt will dramatically reduce the amount of time it takes to pay off your debt.
For example, let’s assume you have a $10,000 car loan with an interest rate of 5.5% and the loan term is five years. Your monthly payment is $191.01 per month. If you receive a large income tax return of $2,000, and you put that entire amount towards your debt, you’ll cut down the time it takes to pay off your car loan from five years to just less than four years. That’s a 20% decrease the total time it takes to pay off your loan!
The emotional aspects of lump sum payments
Making a large extra payment on your debt has a positive emotional effect on how you see your debt. Instead of this huge amount of money that only decreases slightly every month, you get to make a big payment and instantly see a big difference in how quickly you will pay off the loan and how quickly you’ll be debt free. This instant lift will renew your interest in paying down the loan quickly.
For example, let’s say you have that $10,000 loan above at 5.5% interest over five years. When you receive that income tax return and decide to put it towards your student loan, will see your loan balance instantly decrease from $10,000 to $8,000, and you’ll be debt free one year earlier. This decrease in your loan term might inspire you to take another look at your budget and see if you can scrape up another $50 per month to add to your regularly scheduled monthly payments.
If you find this extra $50 per month and put that towards your debt, you’ll see that you’re now going to have the loan paid off in just three years instead of five. Those two simple actions cut your loan length almost in half, and you would’ve have thought to do that if you hadn’t put that lump sum payment down.
Positive action begets positive action. By taking that one simple step of using that lump sum towards your debt, the action snowballs into a soon-to-be debt free you. That’s the real power of lump sum payments.