Pre-Paying

As you saw in the credit card segment, loans are expensive. You can save a substantial portion of money by paying loans off faster or, in the case of smaller purchases, such as a car, you may want to consider delaying your purchase so you can save money and pay up front, thus avoiding the cost of a loan entirely.

If, after taking a look at your finances, you decide that taking out a loan is the best choice for you, consider making a slightly larger monthly payment. By incrementally reducing the amount of principal figured in the compounding interest calculation, you can save a surprisingly large sum of money. For instance, if you paid $500 a month rather than $454.49 as shown in the previous home mortgage example, you shave 7 2/3 years off your mortgage and save almost $30,000 in interest.

How much is too much?
Though you will save money by making higher monthly payments, don't over-extend yourself. It is suggested that no more than 15-20% of your monthly take-home pay should be committed to minimum monthly payments on debt such as credit card bills and no more than 40% of your monthly take-home pay should go to all debts, including rent or mortgage payments.

This is the end of Tutorial 4, Borrowing Basics. If you'd like to receive distance learning credit for completing this session, or if you'd just like to test your knowledge, please take the quiz.

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