Money Saving - Debts
Digging yourself out of debt can be a nightmare for a lot of people, but over a larger period of time, it is very manageable.
You may think that your life is not affected by debt, but if you have credit cards, student loans, a car loan, a home mortgage, or a personal loan, you are being controlled by it to some degree.
There are two important things to consider when you take out a loan. First, you want to make sure you can pay back the loan very easily, because if you encounter a financial hardship, you are going to struggle to pay your bills. Second, you only want to take out loans on appreciating assets. Appreciating assets are any item that gains value over time, such as a house. Cars are not appreciating assets, because they lose value over time, especially if you buy them brand new. In our personal opinion, you should only purchase a vehicle outright (not with a loan), because you will not decrease your monthly cash flow, and you will not have to pay interest on the loan.
Some people encounter a problem with taking on too much debt at a time. These people struggle for years to make ends meet while locked into financial obligations and sometimes ridiculous interest rates.
When you are stuck in obligations to pay your debts, your best option is to pay it off as fast as you can. If you are stuck in this situation, this answer may be offensive to you, because you would pay it off if you had the means to. But, the hard truth is that you have to extend beyond your means to make it happen. The sooner you do this, the sooner you can get back to living a normal life.
If possible, settle your debts by returning the asset. Then, if necessary, purchase another asset from a smaller loan or from out-of-pocket. These actions can make a huge difference to monthly expenses, and they can help you steadily grow your income over time to pay off larger loans.
Another difficult thing about loans are the interest rates. Some people are locked into loans with high interest rates to prevent missing payments or for other reasons. If you get locked into a loans with high interest rates, it is important to pay off the one with the highest interest rate first. Continue paying the minimums on your other debts, and pay any extra amount towards the balance with the highest interest rate.
Those who are less fortunate may also have credit cards that are being charged "cash advance interest", which is a higher interest rate than the initial card. These are more tricky to pay off, because you have to pay off your "cash advance balance", which is the amount of money that you withdrew from an ATM using your credit card. This is tricky, because the only money that is applied to this "cash advance balance" is anything above your scheduled minimum payment. What that means is that if you owe $500 in cash advances, and your minimum payment is $200, and you make a manual payment of $300, only $100 is applied to the "cash advance balance", while $200 is allocated to your minimum payment amount. These bills can get tricky, because you have to determine where you will save the most money while you are attempting to pay them off.
If you have a lot of debts, you want to work towards getting a debt consolidation loan, because the interest rates are far less than your standard interest rate. This usually applies to credit card debt, but it can sometime extend to car loans or personal loans. If you consolidate your loans to lower interest rates, you have the power to pay them off faster, because you will be charged less money on interest every year.
The problem is that when you want to consolidate your debts, your credit needs to be high enough for the amount of money you are asking for. Not only that, but you also need to have a certain debt to income ratio. Loan underwriters don't want to grant loans to individuals with heavy financial obligations, because there is a higher risk that the individual will default on the loan. If this happens, the loan goes to collections, and if the individual still doesn't settle over a couple years, the loan is sold to a third party collection agency for pennies on the dollar, because, at that point, there is very little chance that the individual will repay the loan. This is the risk a loan underwriter considers when making sure you fit their financial criteria. So, the only way to qualify for a debt consolidation loan is to pay down your debt enough to qualify for an amount that is suitable for you. For this to occur, it is important to be persistent with loan officers to see what amount of money you qualify for. Before you have a loan officer pull your credit, make sure that they do pre-approvals, and make sure that they will help you understand how much you need to pay down your debts to get the amount of money you are looking for.
Additionally, you can decrease your debt to income ratio by consolidating your student loans. In the United States, you can usually do this through the Department of Education. By consolidating student loans, you are reducing the amount of money you are obligated to pay on Student Loans every month. Even if you are in a grace period, your post-grace minimum payment amount is still accounted for in your debt to income ratio by loan underwriters.
Additionally for student loans in the United States, if you work in government or in a non-profit company, you can qualify for Public Service Loan Forgiveness, where after 10 years of consistent payments, you can have the remaining balance wiped to zero, without the difference being considered taxable income. Keep in mind that this only applies to loans you have consolidated for that purpose, so it is best to do this as soon as you start paying off your loans.
In conclusion, there are many ways to handle debt. These ideas are for people who are affected by debt, even to a minor degree. It is important to know how we can reduce our debt, so that we can increase the amount of money we get to keep every month. How great would it be to spend that extra money on things that we need or deserve?