Personal loans are a cornerstone of Australian consumer finance, with data from the Australian Prudential Regulation Authority (APRA) showing that as of early 2024, Australians hold over $150 billion in outstanding fixed-term personal loan debt.
This figure, which Personal loans seen consistent growth over the past decade, underscores how many of us rely on this form of credit for major expenses like cars, home renovations, or consolidating other debts.
While these loans provide essential financial flexibility, they also represent a significant commitment.
The Reserve Bank of Australia (RBA)’s series of interest rate hikes since 2022 have made this debt more expensive to service, pushing the average interest rate on new fixed-term personal loans higher.
For individual borrowers, this means a larger portion of each repayment goes towards interest rather than paying down the principal loan amount.
The good news is that you are not powerless against your amortising schedule. By employing strategic repayment methods, it is entirely possible to pay off your personal loan faster than the original term, potentially saving you thousands of dollars in interest over the life of the loan. This not only frees up your monthly budget sooner but also improves your financial resilience and credit health.
This guide will walk you through practical, effective strategies to accelerate your debt repayment and achieve financial freedom faster.
Here’s your numbered action plan to get it done:
1. Make Bi-Weekly Payments Instead of Monthly
This is one of the most effective yet simple tricks. Instead of making one full monthly payment, split it in half and pay that amount every two weeks.
- Why it works: There are 52 weeks in a year, so you’ll make 26 half-payments, which equals 13 full monthly payments. You make one extra full payment each year without feeling a significant strain on your budget.
- Example: A $400 monthly payment becomes a $200 bi-weekly payment. Over a year, you pay $5,200 instead of $4,800, directly attacking your principal.
2. Round Up Your Payments
Look at your monthly payment and round it up to the nearest $50 or $100. This small, consistent addition creates a meaningful impact over time.
- Why it works: Even an extra $20 or $30 per month goes entirely toward your principal. For a 5-year loan, this can shave off several months and save you a considerable amount in interest.
- Example: If your payment is $273, round it up to an even $300 every month.
3. Make One-Time Lump-Sum Payments
Whenever you come into unexpected money, resist the urge to spend it all. Use a portion to make a one-time principal-only payment on your loan.
- Sources of lump sums: Tax refunds, work bonuses, cash gifts, garage sale proceeds, or money from a side hustle.
- Crucial Tip: When making an extra payment, always contact your lender to ensure the extra money is applied to your principal balance and not just credited toward next month’s interest.
4. Refinance Your Loan (If It Makes Sense)
If your credit score has improved significantly since you first took out the loan or if interest rates have dropped, you may qualify for a new loan with a lower APR.
- Why it works: A lower interest rate means more of your regular payment goes toward the principal instead of interest, allowing you to pay it down faster. You can also choose a shorter loan term to accelerate payoff.
- Important: Weigh the costs. Ensure the new loan doesn’t have high origination or refinancing fees that would negate your interest savings.
5. Prioritize Your Loan in Your Debt Strategy
If you have multiple debts, use a proven method to stay motivated. The Debt Snowball (paying off smallest debts first for psychological wins) or Debt Avalanche (paying off highest-interest debts first for mathematical efficiency) method can free up cash that you can then redirect to your personal loan.
6. Revisit Your Budget and Redirect Savings
Conduct a monthly budget audit. Identify areas where you can cut back (e.g., subscription services, dining out, entertainment) and automatically redirect that found money to your loan payment. Treat the loan payoff like a mandatory bill.
A Final Essential Step:
Before you begin, call your lender and ask two questions:
- Are there any prepayment penalties? (Thankfully, these are rare for most personal loans, but you must confirm.)
- What is the specific process for making an extra principal payment? (Do you need to specify it in the memo line? Use a separate portal?)
Paying off a loan early requires discipline, but the financial freedom and peace of mind you gain are well worth the effort. Start with one strategy today and watch your debt disappear faster than you thought possible
