How to pay off debt quickly

Taking out a loan is a big financial commitment which should be taken seriously. As a borrower, you agree to a loan term with a lender at the point of taking out the loan, but you can often repay faster if you’re able to.

A good lender shouldn’t penalise you for repaying your loan earlier with early repayment charges – although some mortgage agreements may charge fees for settling it early. Provided you’ve taken out your loan with a responsible leader, you can often save money by paying off your loan faster than your loan term requires.

Wondering how to pay off debt quickly? We’re here to help. Read on as we dive into the key tips and considerations on how to clear debt fast, helping you to save money in the long run.

In this guide:

• Benefits to paying off your debt quickly 
• Tips for how to clear debt fast
• How to pay off a loan faster: FAQs

Benefits to paying off your debt quickly

There are various potential benefits to paying off your debt early, including:

• Saving money on interest payments: With most loans, you’ll generally pay interest for every single day you have an outstanding balance. If you can reduce the amount of time that you owe your lender money for, you can reduce the amount of interest you have to pay them.
• Freeing up your income: Once you pay off your loan, you can redirect the money from your monthly repayments back towards savings goals, investment accounts or your everyday spending.
• Lowering your debt-to-income ratio: Paying off debt decreases your debt-to-income ratio, which is a key eligibility factor for lenders if you want to take out more credit in the future. 
• Reducing financial stress: Removing the mental and financial hurdle of outstanding debt can be a huge weight lifted off your shoulders. For more insights, explore our guide on how to deal with financial stress.

Loans can come in all shapes and sizes. The term length and interest rates can easily impact how much extra you pay in interest.

For example, payday loans typically come with high interest rates but offer quick access to emergency funds. Meanwhile, long-term personal loans are paid off over a longer period of time. Though interest rates are often lower, the total interest repaid can be more than with a short-term loan due to the length of the repayment term.

Whatever your loan term, paying off your personal loan faster will often help save you cash. Find out more about the impact of interest rates and how they can affect borrowing in our helpful guide to interest rates explained.

Tips for how to clear debt fast

Whether it’s a flexible short-term loan, debt consolidation loan, a mortgage, or a car loan, there are plenty of useful strategies that can help you cut down debt quickly.

Find out how to pay off a loan faster with our tips below:

1. Pay off your most expensive loans first

If you have multiple debts to repay, such as a loan, credit card, and an overdraft, take a look at the fees and interest charges you’re paying on each of them. Focus your attention on paying off the most expensive one first. For example, this could be the one with the highest interest rates. This will be the most cost-effective approach, helping to minimise the interest you’re paying on your debts.

This is also known as the debt avalanche method, where you prioritise your total interest savings rather than settling smaller debts. Alternatively, you can opt to pay off your smallest debts first – known as the debt snowball method – to help motivate you with some quick wins.

2. Repay before you save

It’s often better to prioritise paying off debt over putting money into savings. This is because the cash you lose in interest charges will usually exceed any gains you will make in interest from your savings account. In short, having debts can cost you more money than you can generate from savings. Therefore, whatever money you have spare each month, use it to pay off your loans faster and you’ll be on track in no time.

3. Create a solid budget

To create a realistic budget, you should start by assessing your income streams as well as your outgoing expenses. This way, you’ll be able to identify any areas in which you’re overspending. Once you’ve created your budget, you can reallocate a portion of this money towards paying off your debts.

You can find ways to optimise your budget and make up savings to add to your repayments by:

• Reviewing and cancelling any unused subscriptions.
• Setting a budget for discretionary spending – such as non-essential purchases, treats, and eating out.
• Shop around and switch to more affordable utility and insurance deals to help save money on your bills.

For more budgeting tips, check out our guide to the popular 50/30/20 budgeting rule, which aims to organise your finances into needs, wants and savings each month.

4. Overpay as much and as often as you can

If you find yourself in a position to pay off a little more of your loan than is due, don’t hesitate to overpay. Whether you’re scheduled to make repayments weekly or monthly, your lender should accept overpayments, which can help to reduce your interest charges. You’re usually charged interest on your outstanding balance. The smaller this balance is, the less you’ll be charged in interest.

• Before you begin, check the terms and conditions on how to overpay – each lender will have their own process and potential fees. At Moneyboat, we don’t charge any fees for early repayments..
• You may be able to overpay online, or you may need to make a call to the customer service team.
• You can often set up your direct debit or recurring payment authority arrangement to overpay, or make an additional repayment at any time.

Some lenders may be elusive about overpayments and how they should be made. FAQs on their website are another good place to look for this information, but don’t be afraid to call if it’s not clear.

Here are our tips for how to pay off debt quickly with overpayments:

• Pay more frequently
• Round up your payments
• Redirect any bonus payments or windfall cash to repay your loan
• Schedule an extra payment every year, six months or quarter
• Put every spare penny into your repayments

Watch out for early repayment penalties

Always make sure you check what fees and charges apply before you sign up for a loan. Some lenders may charge a fee for early repayment, which covers the losses they incur from you saving on your interest payments.

This might involve a flat fee, or a percentage of the remaining balance on your loan. If your loan does have an early repayment penalty, it’s a good idea to consider this cost against the potential interest savings you’ll be making.

If you’re not sure if early repayment is the right choice, there are plenty of independent organisations and charities that offer free financial advice, including Citizens Advice, StepChange and MoneyHelper.

How to pay off a loan faster: FAQs

Can you pay off a loan early?

Yes, you can often pay off your loan early if you can afford to. Loan providers are obligated to let you pay off your debt early and in full – but they may charge an early repayment fee.

A good way to protect yourself is to check your lender is registered and authorised by the Financial Conduct Authority (FCA). This is the organisation that makes sure personal finance companies treat consumers fairly.

Will I pay less interest if I pay off my loan early?

Paying off your loan early can help you reduce the total interest you pay. When you pay off your loan early, you’re cutting short the time that interest can build. Making overpayments can also reduce your loan balance and the interest charged on it, saving you money overall.

The bottom line…

Whether you’re hoping to reduce the cost of interest or free up funds to build a larger savings pot, paying off your debt early can help you regain control over your finances. If you’re thinking of paying off your debt faster, make sure to budget any overpayments to your living costs and cover your priority bills first.

Hopefully, you now feel equipped with the necessary knowledge about how to clear debt fast. But if you’re looking for more insights, we’ve got plenty more helpful guides, such as what to do if you're struggling to repay your payday loan.