How I paid off my personal and car loans early

Reading Time: 5 minutes

Debt is very stressful and in most cases it takes away your peace of mind. Debt can either be good or bad. Good debt is the debt you acquire to buy an asset that generates income or to start a business. Bad debt is the debt you acquire to buy “things” of little value or assets that lose value fast. On this article I will explain how I paid off my personal and car loans early.

In 10 months time, a 3 year personal loan with 27.5% interest was fully paid. I also managed to pay off the car loan in 47 months (that is 13 months early).

Life before loans

I bought my first car on cash but later sold it to finance my wedding. During the time it made a lot of sense but this decision was influenced by the heart but not the mind.

The biggest lesson I learnt from this is that a car does not keep value. I sold my first car less than 10 months after buying it but I sold it for about 75% of the purchase price (25% loss). I also learnt the hard way that a new car depreciates faster than a preowned car.

Even though my job required me to visit clients at different locations, my desire to have a wedding clouded my decision making process.

The car loan journey started

Car loan and accident

To ensure I had reliable transport, I applied for a car loan. I was never a fan of debt before which simply means my credit history was still insufficient.

Another mistake – I bought my second car on debt with no shortfall cover insurance. My knowledge about car loans was still very limited.

Why is this a mistake? One month later, I had a terrible accident and my new car was written off. The insurer only paid the market value of the car but the loan balance outstanding was still much higher than the insurance pay-out amount. I received about 80% of what I was owing to the bank and to close off the car loan account I needed to pay 20% from my pocket.

This is the point were things got really messy financially. The wedding had depleted my savings as well as the proceeds from the first car sale. I applied for a personal loan to settle the written off car – another terrible mistake. The bank charged me 27.5% interest for that. I was desperate and sinking financially with limited financial knowledge so I had to accept the offer.

Another car loan

However, I still needed a car to go to work, so I bought another car to replace the one that was written off. Now I was at that point were life was teaching me the hard way and I had to learn. The lessons I acquired during my worst time helped me to be financially literate.

Lessons learnt from this experience

• A car does not keep value, if you sell it too early, you will make a big loss.
• A new car depreciates faster than a preowned car.
• It makes more financial sense to buy a car and drive it for many years before you sell it.
• It is easier to downplay the convenience that a car brings to you when you have it but you will quickly realize it when you no longer have it.
• Taking a big loan with no credit history is a terrible mistake because your interest rate will be too high.
• When you acquire a car on debt, comprehensive insurance is not enough, you need shortfall cover until the point when the car loan balance outstanding is less than the market value of the car.
• An emergency fund is very important because you do not want to face a crisis when you have no savings to help alleviate the pain. Without an emergency fund, you will likely increase your debt.
• It is good to think with the heart but make sure your mind agrees with that.

Guidelines on how I paid off my personal and car loans

Before I start saying many things, I want to acknowledge and give praise to God. This difficult time coincided with the Coronavirus crisis. Many people in my line of work were losing their jobs but mine was secured and I never got sick. This made it possible for the ideas I had to work.

“What is possible is for us to do but what impossible is for God to do.”

This is how I paid off my personal and car loans early:

1. Increasing the monthly payments on the loans

The personal loan was the one that was giving me more pain so I added extra payments every month. I had to cut my spending and used the money to pay off the debt.

Another risk move I had to do was to close my medical aid account and channel the money to the personal loan account. This was a very dangerous move. I am grateful to God that no one in my family got sick during that time otherwise it would have been a bigger disaster.

When the personal loan was paid off, I increased my car loan payments. This coincided with interest rate cuts by the Reserve Bank which means the additional payments were reducing my principal loan amount significantly.

2. Saving and investing money on the side

To some people, this may be contradictory but sometimes when everything is going down financially, you need something to give you hope.

During this time, I started investing in unit trusts. I made sure the money was deducted using a debit order so that I would not be forced by the situation to use the money.

Simultaneously, I started researching about the stock market and started investing in stocks and exchange traded funds (ETFs). I used the knowledge I acquired from my tertiary education to build my investment portfolio.

However, as I was getting confident about investing, the coronavirus crisis happened and the stock market crashed. My portfolio went down by more than 50%. I had hope that things were going to be fine so I bought more stocks and ETFs at cheaper prices.

After a couple of months, I sold my unit trusts and paid off the balance outstanding on my personal loan. Few years later, I sold some of my shares and ETFs and settled the balance on my car loan.

Having extra savings and investments was also important to ensure that I would not be forced to take more debt in the event of another crisis.

3. Using extra income as additional deposits

Additional deposits on loan accounts played a big role in paying the loans early. I channeled the money from bonuses at work to the personal loan.

Something more like a miracle also happened. When I filed for my tax returns, I found out that that the government owed me a lot of money. I also deposited the money into the personal loan account.

Summary

This is how I paid off my personal and car loans early:

• Increasing monthly payments on all loans
• Using extra income as additional deposits on the loan accounts
• Saving and investing separately and then use the money to pay off the loans