How To Get Out of Debt Faster By Paying a Higher Interest Rate

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Today we're going to talk about how to get out of debt faster by paying a higher interest rate. If this sounds a little odd, just stick with me for a few minutes and I'll explain.

When most people shop for a loan, what do they usually look for? The lowest interest rate right? There's a good reason for this. We've been brainwashed into thinking that interest rate is important by all the bank advertising that we see and hear almost every day. Advertising that keeps telling you over and over again that if you get a lower interest rate, you'll save money.

Considering that banks are in business to generate as much profit as possible, it would probably be fairly safe to assume that what they're trying to sell you is actually more in their best interest, not yours.

Take a look at how the following two mortgages. Both are for a $100,000 mortgage.

Right now, the proposed loan doesn't look so great. But watch what happens when we make one small change to the higher interest proposed loan.

For the same $1,000 payment each month, the higher interest loan is paid off 4 years faster, and saves you $48,000. The reason the higher interest loan is paid off faster is because of how much is going toward paying off the principal of the loan each month.

The principal of a loan is the total amount of money borrowed. Often when you make monthly loan payments, most of the payment goes towards the interest charges on the loan. Which leaves very little left to pay down the actual principal of the loan. Getting as much money as possible going toward paying off the principal of your loan is the key to being able to get out of debt faster.

With your current mortgage, $50 a month is currently going toward paying off the $100,000 you borrowed. In the proposed loan, only $30 a month was going toward paying off the principal. But when you add the extra payment of $290 a month, the total amount going toward paying off the principal of the loan goes up to $320 per month.

$320 a month will pay off the principal of your loan a lot faster than $50 will.

How a loan is structured is more important than the interest rate. By amortizing your loan over a longer period of time, you can usually get your monthly payment reduced. Take the monthly savings and use it as an additional payment on your loan each month. You might be charged a higher interest rate to do this, but it'll usually still get you out of debt faster and save you a lot of money.

So the next time you're shopping around for a loan, tell the lenders that you don't care about the interest rate. What really matters to you is when you'll be out of debt, and how much it's going to cost you. I'm sure you'll confuse more than a few of them, so have fun with it.

For more information on getting out of debt, please check out our more popular debt articles listed in the box below, or you can see our complete list of articles about debt.

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