Velocity Banking: How to Pay Down Debt Fast

Did you know there is a faster way to pay down your debt?

Have you heard of “velocity banking?”

If so, I am sure you have heard it to be a scam and does not save you any money.

I am here to say that is false. It’s not an easy strategy but it works.

Sure you can just pay extra each month but that impacts your ability to spend money on things you need, etc..

So, what is velocity banking?

Heres the jist: You take a small loan on your credit as a lump sum and pay off outstanding debt. This credit loan will come at a higher interest (most of the time) but will reduce your debt much faster therefore reducing the front loaded interest being paid on the student loan. Confusing right?

It took me forever to wrap my head around this…

So here’s an example using a LOC:

• Student Loan Balance: $30,000
• Student Loan Interest Rate: 5.8% per year
• Monthly Student Loan Payment: $270
• LOC Credit Limit: $1,000
• LOC Interest Rate: 6% per year
• Monthly Income: $3,000
• Monthly Expenses (excluding student loan payment): $2,229
• Extra Monthly Income: $500
• For LOC’s make sure you put all your expenses that can be paid by credit card on the credit card

Step-by-Step Process

Monthly Budget:

• Income: $3,000
• Expenses: $2,229
• Student Loan Payment: $271
• Total Expenses: $2,500
• Extra Income Available for Debt Repayment: $500

Using the LOC:

• Use the $1,000 from the LOC to make a lump sum payment on the student loan.
• New student loan balance: $30,000 – $1,000 = $29,000

Using Extra Income to Pay Down LOC:

• With $500 in extra income per month, use this in addition to your expenses amount to pay off the LOC balance
• Monthly interest on the LOC:  $1,000×6%/12 = $5
• Monthly LOC repayment amount: $500 (extra income) – $5 (interest) = $495

Repaying the LOC:

• Time to pay off the $1,000 LOC: $1,000/$495 ≈ 2 months

Interest Savings on Student Loan:

• Original monthly payment: $271 (interest + principal)
• Monthly interest on original loan balance: $30,000x (5.8%/12) = $145
• After the $1,000 lump sum payment, new loan balance: $29,000
• New monthly interest: 29,000 x (5.8%/12) = $140.83
• Monthly payment remains the same at $271, but more of it goes towards the principal now.

Total Interest Paid on LOC:

• Monthly interest on LOC: $5
• Total interest over 2.02 months: $5 \times 2.02 = $10.10

Interest Saved on Student Loan:

• Initial monthly interest: $145
• New monthly interest: $140.83
• Monthly interest savings: $145 – $140.83 = $4.17
• Over 2.02 months, interest savings: $4.17 \times 2.02 = $8.42

Net Interest Savings:

• Total interest saved on student loan: $8.42
• Total interest paid on LOC: $10.10
• Net interest cost: $10.10 – $8.42 = $1.68 (additional cost due to higher LOC interest rate)

Aaaaaannnd repeat until the loan is paid off! If you have more extra monthly income I suggest you use it and it will be paid off even faster. 

Using a LOC on a credit card is like using someone else’s money to pay off my debt faster while still being able to live normally and not worry about having enough money to cover emergencies since it would just for on the credit card. Just be sure to be disciplined and have a clear understanding of velocity banking. Do not get ahead of yourself. If used properly it can be a game changer for your finances. Again not financial advice!

**Disclaimer: All information provided is for informational purposes only, and shall not be relied upon as personal financial advice. Any reference to a specific investment strategy is only to assist in learning, and shall NEVER be relied upon when making future investment decisions.