My debt. Hard to say, hard to look at, harder to make disappear. Now that you’ve started piecing together your financial snapshot, chances are you might find yourself looking at some debt. Some financial whiz kids will say that all debt is bad news. But chances are, at some point in your life, you are going to have a wee bit of debt on your plate. Regardless the type of debt that you carry, the most important thing you can do is execute a plan to get out of debt in the smartest, quickest, cheapest way possible.
Common Types of Debt
Before you start whipping out your handy dandy calculator, pencil, and paper, let’s figure out what kind of debt you’re dealing with.
Paying Down Your Mortgage
Mortgages are typically pretty straightforward, IF you have a fixed rate loan. The typical length of a mortgage is either 15 or 30 years. When you secured your mortgage, you not only locked in the length of time for repayment, but also locked in a fixed interest rate. You are typically welcome to make additional mortgage payments without penalty.
If you have a variable rate loan, you were able to lockdown a lower rate at first, for a fixed period of time (3, 5, or 7 years). These mortgages are called ARMs or adjustable rate mortgages. During the fixed period, things are pretty predictable. Once you get outside of the fixed period your interest rate adjusts as does your monthly repayment. Scary if you didn’t read the fine print.
Repayment Tip: If you can make an additional mortgage payment each year, you can save yourself a substantial amount of money on interest.
Money Saving Tip: If you have a 30 year fixed rate and can stand to refinance to a 15 year mortgage, you can save even more. If you have a VA loan, there is a “streamlined” VA to VA loan process to help you reduce your interest rate and refinance from a 30 year to a 15 year mortgage or from a variable to a fixed rate mortgage, with little or no upfront cost to you.
Paying Down Your Car Loan
Pretty straight forward. These are fixed loans for a fixed time period. The standard repayment period on a new car is typically 60 months. For a used car, 36-48 months or less. Car loans are slightly tricky because, if you choose a “no downpayment” option, you automatically owe more than your car is worth when you roll if off the lot. No kidding. New cars depreciate in value nearly 20% at time of purchase. There are typically no prepayment penalties, so you could, in essence, pay off your car sooner if you’d like.
Repayment Tip: Make extra car payments or send a little bit more in each month to bring down the interest costs.
Money Saving Tip: Do your best not to carry multiple car payments at the same time. Stagger your car purchases to ensure you only ever have to pay one car down at a time. Even better? Take excellent care of your cars by doing the required maintenance, and you’ll be surprised how far your car will go. One of our cars is coming up on its 10th birthday and is in excellent <knocking on wood> condition. EVEN BETTER? After you pay off one car, continue to make that car payment into a savings account so that when you’re ready to buy your next car you can buy it cash or at least have a sizable down payment.
Paying Down Your Credit Cards
Whether you’re card is a major label credit card or a store credit card, they are ALL credit cards and are a type of revolving or open-ended loan. Basically, you have open access to credit (up to your limit) for your use at any time you choose to use it. The curious thing about credit card debt is that it is darn near impossible to get rid of if you continue to use it. Short story, if you want to pay off credit card debt, you have to stop charging stuff to your credit card. Sounds easy…is often overlooked.
Store cards are notoriously high interest rate cards. I bet you’ve always wondered what Victoria’s secret was…turns out, she lures you in with coupons and then slams you with a 19.9% default APR. Some go as high as 24.99%, and never mind what happens if you, heaven forbid, are late on a payment <crosses self>.
Repayment Tip: Pay off high interest credit cards first. How? Make just the minimum payments to lower interest cards and apply additional funds to the highest interest rate card until that debt is paid down. Once you pay off that card, attack the next highest rate card by adding what you were already paying to the previous card to the current cards minimum payment. Or just go visit my favorite smart, quick, cheap, FREE debt repayment calculator at PowerPay.
Money Saving Tip: Did you get an offer for a no-fee balance transfer, 12 months no-interest credit card? If you have a card or a portion of a card you can pay off in 12 months or less, transfer the balance and pay that sucker off free of compounding interest!
Paying Down Your Personal Loans
These types of loans are iffy to say the least. Good on you if you remember why the heck you took out this type of loan. These loans typically come at a moderate interest rate and have a fixed repayment period. The sooner you can pay it off, the better.
Repayment Tip: Treat it just like you would a credit card in your pay-off plan.
Money Saving Tip: If you used this loan to pay for a vacation or to cover an emergency related expense, once you pay it off, start paying the same amount into a savings account so that you don’t have to take out a loan to deal with those types of expenses.
Paying Down Your Student Loans
These are the loans that will follow you to death do you part. They are virtually impossible to get out of repaying, even in the case of filing for bankruptcy. There are two main types of student loans: Federal and Private.
Federal student loans are regulated by the federal government and adhere to lending guidelines set forth via government policy. Private student loans are, well, you guessed it, offered via private lending institutions and are governed as such. Not sure which type you have? Visit the National Student Loan Data System to see if you hold any federal loans. Chances are, if you dont’ see your info there, you’re holding some private student loans.
Repayment Tip: Treat these like your mortgage and car payment, if you have consumer debt. If you have zero consumer debt, start throwing money at this and pay if off ASAP.
Money Saving Tip: If you ever find yourself in hardship, or you’re a parent of a student that has graduated, but has yet to find gainful employment, you can ask to put your loan into hardship deferment. Although you will be responsible for paying the interest during the deferment period, you will not be required to make a payment.
Super money savvy college student tip: In school? Getting that monthly statement with the accrued interest for each month? Forgo an evening out or a couple of lattes and pay your interest off each month while enrolled in school! That way, you’ll get to immediately start paying on the principle amount borrowed rather than the compounded interest you racked up while gettin’ your learn on.
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