Acceleration

Paying off your debt sooner comes with numerous advantages, like saving money and avoiding paying extra interest. In this brief explainer, we’ll tackle the key terms concerning acceleration in loans, take a closer look at how they work, and discuss the key benefits of accelerated payments on your loans and credits.

What Is an Accelerated Payment?

As the name suggests, accelerated payment is an approach to loan repayment where the borrower makes additional voluntary payments to speed up the entire process. The aim is straightforward: reduce the outstanding balance and the sum the borrower still owns on the loan and minimize the interest.

Not all lenders encourage accelerated payments: some loans include a prepayment penalty, a fee that the lender charges to disincentivize speedier loan repayments. It makes sense, as paying off a loan during a prolonged period means more interest for the lender. If you want to avoid prepayment penalties, look for different lenders or try to negotiate a lower penalty with your lender.

How Can You Accelerate Payments?

There are a couple of ways to speed up your loan repayment. Let’s take a look at how you can do it:

Increase the payment frequency

If you’re paying once a month, you can increase the frequency by paying weekly or bi-weekly. For instance, with 52 standard weeks in the year, accelerated weekly payments will lead to paying an entire additional month, which will help save considerable sums on interest. In the case of bi-weekly payments, you should divide your monthly payments by 2, resulting in 26 payments per year, which will also help avoid paying costly interest.

Shorten the amortization period

The amortization period is the time necessary to repay the principal and the interest. To shorten the amortization period, you can increase the amount of your regular loan payments. For instance, instead of paying $100 monthly, you can pay $125 and shorten the overall loan repayment period.

Make additional payments

If you came into possession of a lump sum, like an inheritance or commission check, you should consider using it to cover your loan.

Accelerated Mortgage Payments: Pros and Cons

One of the most common accelerated payments you’re likely to encounter involves mortgages. Aimed at reducing the interest and paying off the loan quickly, this strategy can be realized by increasing payment frequency, shortening the amortization period, or making lump-sum payments. Although we’ve already discussed some of the benefits and drawbacks of accelerated loans, let’s make a quick recap and take a closer look at how they work on mortgages.

Advantages

• Build Equity Faster. Extra payments will help cover the principle rather than interest and build equity — a portion of the property you own — faster.
• Pay Off the Mortgage Faster. Additional payments mean that you will reach full ownership of your home sooner.
• Save Money. Accelerated payments result in paying off the principal faster, which can save thousands of dollars.

Disadvantages

• Prepayment Penalties. If the loan includes a prepayment penalty, you will pay additional costs.
• Save Less On Taxes. Accelerated payments mean you can lose tax-deductible interest, which is part of standard mortgage loans.

To wrap it up, paying your debt sooner has many advantages, like avoiding hefty interest and potentially saving thousands of dollars. With some loans, especially mortgages, including prepayment penalties, comb through the loan terms and conditions to avoid the pesky fees.