Archive for October 6th, 2008
Oct
06
How to Pay Off Your Debt Faster With Less Interest
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Cornie Herring asked:
Debt needs to be paid off, you have no other option, but you can choose the way to pay it off. If you have a certain amount of money to pay off a portion of your debt each month, you can choose to allocate any extra cash on the highest interest rate debt or the highest amount debt. Both serve the same purpose of paying off your debt, but which one is better? If I were you, I would choose the method that can help to pay off my debt faster and with less total interest.
In fact, there is an approach that can help you pay off your debt faster and with less interest. This approach is called Debt Avalanche. By paying your debt using debt avalanche approach, you will pay off your debt faster and pay less total interest to your creditors. How it work?
To use the debt avalanche approach, what you need is a list of interest rate of all your debts. Let make it simple by assuming all debts have the same tax liability, but if you want to compile for your debts that have different tax liability, then you need to determine the debts’ interest rate after taxes. You will need these interest rates for calculation in debt avalanche approach. Below are the steps involve in the compilation and calculation on which debt to pay more in debt avalanche approach so that you save money in term of interest and be debt free faster:
Step 1: Order your debts with highest interest rate to lowest.
List your debts on a paper (or spreadsheet if you use software) according to the interest rates, sort them from the highest interest rate to the lowest. Normally, credit cards will be ranked higher as typically credit card interest is 10% to 20% or more. Then, personal loans may be your next highest interest rate loan followed by auto loan, mortgage and home equity loan. Don’t border about the balance of each debt, it will not be used in this debt avalanche approach.
Step 2: Pay minimum due on each debt
Then, add a column on your list or spreadsheet for the minimum amount need to be paid each month. This is the amount you need to pay toward each debt, except the one on the top list. Then, compile the list for the total minimum amount that you need to pay for that month.
Step 3: Pay extra cash toward the debt at the top list
In order for the debt avalanche approach to work, the money you prepare to pay your monthly debt should have a bigger amount than the total minimum month due for all your debts. Pay only the minimum due for all your debt except for the top listed debt which has the highest interest rate. Allocate the extra cash (the money you allocate for your debt minus the minimum monthly due on each debt) to this highest interest rate’s debt, the top one on your list.
Step 4: Repeat every month
By paying the minimum due each month, you are meeting the payment requirement of every creditor. And at the same time, you hone in on only your debt with the highest interest rate. Repeat step 1 to step 3 every month, you need to re-order your list if your debt interest rate has changed. Remove from the list if the debt had been paid off (it might not be the debt on the top list if other amount is smaller).
If you record your payment each month, you will notice a significant amount save in term of interest and the time frame to pay off your debt is shorter. You can do a simulation in spreadsheet software if you want to know how effective the debt avalanche approach helps in paying off your debt faster and save in total interest.
Summary
Debt avalanche approach is mathematically the best method for paying off your debts. It helps to get rid your debt faster with less total interest.
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Debt needs to be paid off, you have no other option, but you can choose the way to pay it off. If you have a certain amount of money to pay off a portion of your debt each month, you can choose to allocate any extra cash on the highest interest rate debt or the highest amount debt. Both serve the same purpose of paying off your debt, but which one is better? If I were you, I would choose the method that can help to pay off my debt faster and with less total interest.
In fact, there is an approach that can help you pay off your debt faster and with less interest. This approach is called Debt Avalanche. By paying your debt using debt avalanche approach, you will pay off your debt faster and pay less total interest to your creditors. How it work?
To use the debt avalanche approach, what you need is a list of interest rate of all your debts. Let make it simple by assuming all debts have the same tax liability, but if you want to compile for your debts that have different tax liability, then you need to determine the debts’ interest rate after taxes. You will need these interest rates for calculation in debt avalanche approach. Below are the steps involve in the compilation and calculation on which debt to pay more in debt avalanche approach so that you save money in term of interest and be debt free faster:
Step 1: Order your debts with highest interest rate to lowest.
List your debts on a paper (or spreadsheet if you use software) according to the interest rates, sort them from the highest interest rate to the lowest. Normally, credit cards will be ranked higher as typically credit card interest is 10% to 20% or more. Then, personal loans may be your next highest interest rate loan followed by auto loan, mortgage and home equity loan. Don’t border about the balance of each debt, it will not be used in this debt avalanche approach.
Step 2: Pay minimum due on each debt
Then, add a column on your list or spreadsheet for the minimum amount need to be paid each month. This is the amount you need to pay toward each debt, except the one on the top list. Then, compile the list for the total minimum amount that you need to pay for that month.
Step 3: Pay extra cash toward the debt at the top list
In order for the debt avalanche approach to work, the money you prepare to pay your monthly debt should have a bigger amount than the total minimum month due for all your debts. Pay only the minimum due for all your debt except for the top listed debt which has the highest interest rate. Allocate the extra cash (the money you allocate for your debt minus the minimum monthly due on each debt) to this highest interest rate’s debt, the top one on your list.
Step 4: Repeat every month
By paying the minimum due each month, you are meeting the payment requirement of every creditor. And at the same time, you hone in on only your debt with the highest interest rate. Repeat step 1 to step 3 every month, you need to re-order your list if your debt interest rate has changed. Remove from the list if the debt had been paid off (it might not be the debt on the top list if other amount is smaller).
If you record your payment each month, you will notice a significant amount save in term of interest and the time frame to pay off your debt is shorter. You can do a simulation in spreadsheet software if you want to know how effective the debt avalanche approach helps in paying off your debt faster and save in total interest.
Summary
Debt avalanche approach is mathematically the best method for paying off your debts. It helps to get rid your debt faster with less total interest.
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Oct
06
Lifting the Veil on Debt Consolidation UK
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Ed Pearson, Debt Dr asked:
You’re sitting there one day, off from work due to the stress of your unsecured debts weighing heavily upon your shoulders. Suddenly, in the background noise from the TV you hear a fantastic deal – consolidate your existing debts into ‘one easy affordable loan’. You think wow, just what I need to get my debts under control and you get the sales blurb.
Sounds great doesn’t it?
Debt consolidation in the UK is not a new phenomena these days. It’s been around a while. Lots of people have taken out debt busting consolidation loans. So why is the amount of debt in the UK still rising so fast? And why are bankruptcies, IVA’s and debt counselling services stretched to their limits and running at all time high figures right now? Well people get sold on the advantages but I’d recommend thinking about the disadvantages too!
Advantages of debt consolidation UK
Well the interest rate normally comes down on the unsecured debt amount borrowed making the monthly payments easier to afford.
Your debts come under control quickly so the annoying telephone calls and letters from irate creditors stops.
Disadvantages of debt consolidation UK (this is the bit they don’t want you to think too hard about)
To get a debt consolidation loan usually requires some form of property. By consolidating the unsecured debts to your home some of the equity has now been lost. So what was once an unsecured debt now forms part of a charge over your property. Every legal advert in the UK selling this type of service will point out in the small print that your home is at risk if you fail to keep up payments on (this now larger) secured loan. So you’ve put more risk onto your property. I regularly meet people who have bought their house maybe 20 years ago for figures like £80,000 on a house worth £110,000 to find that a decade on they have a house worth (say) £180,000 with a new debt consolidated mortgage of £150,000. So they still only have a similar amount of equity in the property but also have a mortgage now nearly double in size!
Another disadvantage is that the term of the borrowing is usually increased. Well sometimes the debt consolidation companies in the UK will sell that as a benefit with a line like ‘you can take longer to pay your debt and allow yourself time to get on top of your borrowing over the coming years’. I find that an odd statement. You have doubled your mortgage in a decade and you have found yourself in debt but suddenly your spending habits will change and you’ll be debt free at some point in the future. What are your thoughts as you read that? Another interesting point arises here. Because the term is often longer, you will possibly end up paying much more of your hard earned money for that unsecured borrowing by the time you pay off your new secured lending.
Did the debt consolidation company ask what your lifetime ambitions are? You see, you may have got out of the immediate debt issues but you may just also have signed away the possibility of that early retirement / new car / that holiday to see your family down under too. You see, if the amount you are paying back is higher than you had budgeted for then you may need to work longer to achieve your dreams. Was this discussed with you?
Did you consider at least 6 solutions for getting our of debt trouble before you decided on your debt consolidation loan? Can the company you speak to even name 6 solutions for getting out of debt trouble? If not then you have ignored several other options that may have been more suitable for the financial position you found yourself in. It’s rare indeed to find loan and mortgage brokers that are fully trained in solutions to tackle insolvency and debt issues. They have their offering and will talk about the monthly repayment figures to demonstrate how you could be better off, but is it the best way forward? Well naturally, that depends on your situation.
A final word on debt consolidation in the UK
Now, I do believe that debt consolidation has its place but I also think that there could be more done to understand that there are other options for getting out of debt. Getting the right debt help and advice is essential. Look at the advantages and the disadvantages for each solution you consider for debt resolution and then make a more informed decision.
There are more options for getting out of debt trouble then most people realise, that includes debt consolidation but is not limited to just that course of action.
If you would like to know what the 6 solutions to debt in the UK are then you can get debt help and advice from Ed Pearson at Debt Dr.
This article does not constitute regulated advice. Please remember that any action regarding financial advice should always be taken only after considering the specifics of your own situation.
To find out more about Ed try, http://www.advice4debt.co.uk/debtquiz.htm
Ed Pearson is a Debt Dr offering debt help and advice to individuals and small businesses across the UK.
Whilst you may love the stuff he writes, you should only ever take action once you have considered your own set of financial circumstances with a professional. This article does not constitute financial advice.
Caffeinated Content
You’re sitting there one day, off from work due to the stress of your unsecured debts weighing heavily upon your shoulders. Suddenly, in the background noise from the TV you hear a fantastic deal – consolidate your existing debts into ‘one easy affordable loan’. You think wow, just what I need to get my debts under control and you get the sales blurb.
Sounds great doesn’t it?
Debt consolidation in the UK is not a new phenomena these days. It’s been around a while. Lots of people have taken out debt busting consolidation loans. So why is the amount of debt in the UK still rising so fast? And why are bankruptcies, IVA’s and debt counselling services stretched to their limits and running at all time high figures right now? Well people get sold on the advantages but I’d recommend thinking about the disadvantages too!
Advantages of debt consolidation UK
Well the interest rate normally comes down on the unsecured debt amount borrowed making the monthly payments easier to afford.
Your debts come under control quickly so the annoying telephone calls and letters from irate creditors stops.
Disadvantages of debt consolidation UK (this is the bit they don’t want you to think too hard about)
To get a debt consolidation loan usually requires some form of property. By consolidating the unsecured debts to your home some of the equity has now been lost. So what was once an unsecured debt now forms part of a charge over your property. Every legal advert in the UK selling this type of service will point out in the small print that your home is at risk if you fail to keep up payments on (this now larger) secured loan. So you’ve put more risk onto your property. I regularly meet people who have bought their house maybe 20 years ago for figures like £80,000 on a house worth £110,000 to find that a decade on they have a house worth (say) £180,000 with a new debt consolidated mortgage of £150,000. So they still only have a similar amount of equity in the property but also have a mortgage now nearly double in size!
Another disadvantage is that the term of the borrowing is usually increased. Well sometimes the debt consolidation companies in the UK will sell that as a benefit with a line like ‘you can take longer to pay your debt and allow yourself time to get on top of your borrowing over the coming years’. I find that an odd statement. You have doubled your mortgage in a decade and you have found yourself in debt but suddenly your spending habits will change and you’ll be debt free at some point in the future. What are your thoughts as you read that? Another interesting point arises here. Because the term is often longer, you will possibly end up paying much more of your hard earned money for that unsecured borrowing by the time you pay off your new secured lending.
Did the debt consolidation company ask what your lifetime ambitions are? You see, you may have got out of the immediate debt issues but you may just also have signed away the possibility of that early retirement / new car / that holiday to see your family down under too. You see, if the amount you are paying back is higher than you had budgeted for then you may need to work longer to achieve your dreams. Was this discussed with you?
Did you consider at least 6 solutions for getting our of debt trouble before you decided on your debt consolidation loan? Can the company you speak to even name 6 solutions for getting out of debt trouble? If not then you have ignored several other options that may have been more suitable for the financial position you found yourself in. It’s rare indeed to find loan and mortgage brokers that are fully trained in solutions to tackle insolvency and debt issues. They have their offering and will talk about the monthly repayment figures to demonstrate how you could be better off, but is it the best way forward? Well naturally, that depends on your situation.
A final word on debt consolidation in the UK
Now, I do believe that debt consolidation has its place but I also think that there could be more done to understand that there are other options for getting out of debt. Getting the right debt help and advice is essential. Look at the advantages and the disadvantages for each solution you consider for debt resolution and then make a more informed decision.
There are more options for getting out of debt trouble then most people realise, that includes debt consolidation but is not limited to just that course of action.
If you would like to know what the 6 solutions to debt in the UK are then you can get debt help and advice from Ed Pearson at Debt Dr.
This article does not constitute regulated advice. Please remember that any action regarding financial advice should always be taken only after considering the specifics of your own situation.
To find out more about Ed try, http://www.advice4debt.co.uk/debtquiz.htm
Ed Pearson is a Debt Dr offering debt help and advice to individuals and small businesses across the UK.
Whilst you may love the stuff he writes, you should only ever take action once you have considered your own set of financial circumstances with a professional. This article does not constitute financial advice.
Caffeinated Content
