Have you ever paid extra on your loans? Generally people just simply add extra money to their check and figure that everything is going to work out fine. One common misunderstanding is that the people need to specifically apply the extra to the principle of the loan. This is the most effective way to pay down your debt quickly. If you are considering doing this you should speak to your bank and make sure that the following three things are not happening.
1) Some banks simply take that money and apply it to the next payment that you make. This does not decrease the principle amount, and so you will pay more interest then if you applied it the principle alone. You can often specify on your payment ticket how much of the extra money you want applied specifically to the principle. You should have any extra applied to the principle.
2) Some banks apply your payment to the accrued interest first, and then put the rest towards the principle of the loan. One credit union I had a car loan with did this. They refused to take a principal only payment. So I went in on the days that my payment was made (with automatic deduction to reduce the interest rate) and made additional payments. Although the interest was only a small amount, it did make a difference.
3) If you are considering making an extra payment a year to reduce the amount on your mortgage, you should research the option carefully. Mortgages often do this by deducting half of your monthly payment every two weeks. It may be more beneficial to simply pay the extra payment divided by twelve along with your mortgage payment each month. You need to watch for hidden fees associated with this benefit.
As you take out loans, you should be wary of companies that have high prepayment penalties. Credit cards will pay the interest and then apply the rest of your payment to your principle. It is also most beneficial to put all the extra money you are paying on one debt at a time, because this helps you to quickly reduce the principle and save yourself interest.
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