Adulting: Loan Repayments

The banks aren’t likely to tell you this, but I will. You can mess with how much interest you get charged on a loan. It’s not that hard. It’s actually really simple. Followers of that Dave Ramsey bloke let me in on it through their own books.

Dave Ramsey’s way of getting it done is having an off-set account. This means that instead of getting paid into your regular account, you get paid into this off-set account which basically means your pay is going into your loan account. You withdraw from it as you need to cover essentials and leave the rest in there. Having such a huge amount of money going into the account each pay fortnight means less interest charged even though some of it is being pulled out to cover the cost of living.

There are two points that are essential to know however: It takes a huge amount of financial control/restraint/awesome budgeting to make this work so not all banks will offer this to every customer if they can see a borrowers track record on spending isn’t that great; there needs to be a basic understanding of how interest is calculated.

Interest is calculated monthly in arears. Simply, this means that the clever little calculators look back on how much your loan account had in it every day of the previous month (e.g. August) and on the first day of the next month (e.g. September 1^st) you get whacked in the face with the interest. So for every individual day that the amount owing has come down a bit, there’s less interest charged. Months with 31 days in it will always hurt interest-wise a little more than days with 30 or 28.  How interest is calculated also means that when it comes to making repayments it’s better to make them fortnightly or weekly rather than monthly.

Me being me though, I don’t do it this way. I do it my way. I get paid into my usual account (which isn’t with the same bank). When setting up the fortnightly automatic repayments out of my usual account I cringed when the number was $518. I asked my lending manager can that be changed, it’s doing my head in, it needs to be a number divisible by 5 so he bumped it up to $520. And then I thought ‘Upping it by $2 every fortnight is going to make f*** all of a difference’ so I logged on and changed it again… to $525, $7 more than what I’m supposed to repay. I didn’t stop there. As I said before, every day the loan has less money owing is a lower interest hit at the beginning of the next month. So next I scheduled $10 to automatically transfer over every Monday. That’s another $40 extra per month totalling $54 extra per month. As mentioned in the budgeting blog, the tax bill and council rates means I’ve had to put these extra repayments on hold for a while, just until I’m a bit more stable again. When I hook back in I’m going to change the extra payments from being on Mondays to being on Sundays and Tuesdays, still at $10 apiece. Which means I’ll go from $40 extra repayments to $80 extra repayments (totalling $94 per month extra).

How does this play out in the long run (which is where it is most important)? My loan is a 30 year loan. I’ve had this loan for 2 years and 1 month now which means I have 27 years and 11 months’ time limit left to pay it back. However, the estimated term of when I’ll have it paid off is 21 years and 6 months. That means I am over 6 years ahead on my repayments, I’ve achieved this in 2 years. Imagine how quickly you could pay off your own loan just by tweaking a few things!