Managing Debt: Over-levered & Under-saved
By: Rapunzl Robot
Tags: Student Loans, Debt, Auto Loans, Credit Cards

Carrie Schwab-Pomerantz states “having a plan on how you’ll pay off the debt can keep you focused on what it will take to attain ‘financial freedom’”.

THE CURRENT DEBT SITUATION

Did you know that total household debt balances increased by $193 billion in the fourth quarter of 2019, and now stand at $ 14.15 trillion?

To put things into perspective: balances have grown $1.5 trillion higher than in the 3 rdquarter of 2008 right in the midst of the housing crisis recession.

Despite mortgages representing the most of aggregate household debt, this post will focus more on strategies to paying down auto loans, credit card debt, and student loans which are the most prevalent & sometimes more complicated to fully grasp. Then we discuss how to repay that debt.

While a budget and saving money are great goals, paying down debt, is not only an important skill but essential to living a financially free life. We’re not saying that all debt is bad. Sometimes debt can be a really great tool to finance college, a business idea, or increase your productivity. But with $14 trillion in debt in the US alone, its clearly important — particularly since over 30% of Americans are behind on payment & have delinquent Credit Card debt.

GET IN THE ZONE: AUTO LOANS

Imagine you needed a car and the salesman at the dealership offered you a “great offer” by knocking thousands of dollars off the sticker price. It happened so fast. Now, before you know it, you’ve signed for an auto loan and are driving off the dealership lot.

Maybe you didn’t read the fine-print & missed that your loan includes common add-ons such as GAP waivers, services contracts or extended warranties, tire and wheel warranties. While you may have agreed to these when you bought your car, you may not have understood the full cost. Canceling them will decrease how much you owe on your auto loan, allowing you to pay off your car loan faster.

MOST PEOPLE ARE UNAWARE…

You can also refinance an auto loan (IE find a lender to pay off the dealerships financing arm) and begin making repayments on a new loan at a lower rate. Although average rates dropped at the end of 2019 to 5.5% APR from 6.0% in 2018, refinancing may be a great option if:

Your credit has improved since signing for the original loan or you aren’t underwater on the auto loan (meaning you do not owe more than your vehicle is worth).

If you do not face high penalties for paying off the current loans

You got the auto loan through a dealership, especially a “buy here, pay here” establishment. The average hidden interest rate added by dealers is 2.47% and “buy here, pay here” businesses are known for predatory lending practices.

A FINAL NOTE

So, instead of paying once a month, take your existing car payment and split it in half. Paying every two weeks means your loan balance is continually decreasing, which has the effect of paying less interest over the course of the loan.

TIPS & TRICKS FOR CREDIT CARDS

BALANCE TRANSFER

Many experts recommend transferring the balance from a higher interest rate credit card to one with no-interest or low-interest balance transfer offer to reduce the amount you make in interest payments.

Additionally, there are many credit cards that will not charge any interest, including none on balance transfers for a year or more. However, if you fail to repay the entire outstanding transfer balance within that no interest window, the remaining amount will have a new annual percentage rate applied to it.

ASK FOR A BREAK

You may not believe it, but cardholders with high levels of interest bearing debt can reach out to their issuer directly to request a break on interest rates. According to research from CompareCards.com, 81% of cardholders who asked for a lower rate typically saw reductions between 5 percentage and 6 percentage points.

PUT YOUR CARDS ON ICE

The best way to stop accruing debt is stop using credit cards and racking up more debt. Do whatever you need to do eradicate usage whether its hiding them from yourself, or cutting the card up and not requesting a new one. Then it is best to switch to a debit card or start withdrawing cash and stick to a stricter budget.

STUDENT LOANS

REFINANCE

By refinancing your student loans you will be consolidating your existing private and federal student loans into a new, single student loan with a lower interest rate. Meaning that your monthly payment with be lower thus allowing you to aggressively pay repay more student loan debt, save or invest.

Here are a few companies that offer to refinance student loans:

REPAYMENT PLAN

The first step to repaying debt is to figure out how much you owe. Then you have a decision: to use the “Debt Avalanche or “Debt Snowball” method to knock out some of those debts & reduce your outstanding balance.

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