Debt is a commonly accepted fact of life for most people. Unfortunately, that mindset can get you in over your head quickly. At what point do you draw the line between an acceptable amount of debt and an excessive amount of debt? For many, people find that line after they have crossed it. Often, people realize they have too much debt when their monthly payments get out of control. When you have a hard time paying the minimums every month, you know you have a problem.
Thankfully, people change. Sometimes, after hitting financial rock bottom, people realize debt sucks up a major portion of their monthly budget. They decide they no longer want debt to take a major part of their lives. However, first they must dig themselves out of the debt hole they created before they can remove the debt costs from their monthly budget.
So, how can you lower your cost of debt so you can pay your debt off faster? Here are five ways you can cut down on your interest costs.
0% Balance Transfer Credit Cards
Using 0% balance transfer credit cards can give you a reprieve from higher interest rates. Here’s how it works.
Rather than paying 19.99% interest on another credit card or 5.9% on your car loan, you can get an introductory 0% interest balance transfer credit card offer. If you’re approved for one of these offers, you will often be able to transfer a balance from another debt to your credit card and pay 0% interest for the introductory time period.
The introductory 0% interest balance transfer offers range in length. Some are as short as a few months while others last as long as 21 months. This time can save you some serious money on the interest payments you’d usually be making on the debt. Learn how credit cards aren’t all bad and how they can help you.
What to Watch Out For
Of course, these offers aren’t all good. Credit card companies still find ways to make money over time with these offers. Companies hope you transfer more debt than you can pay off during the introductory time period. If you don’t pay the debt off by the time the introductory 0% interest rate expires, you’ll have to pay the higher normal interest rate on whatever balance remains. Of course, you could always open a new card with another introductory 0% interest rate balance transfer offer and continue the interest free time period.
You also need to watch out for balance transfer fees. Some cards offer no balance transfer fees as a benefit. Others have a fee free period for the first few days or months you have the credit card. However, most cards charge a fee that ranges from two to five percent or more. Some cards may also limit the amount of debt you can transfer. Another common limitation is what types of debt you can transfer to your new card.
If you’re working to pay your debt down, using these offers is a great way to lower your interest rates and put more money toward paying down your principal. That said, if you’re not actively paying your debt down, balance transfer offers can quickly turn in to an even bigger debt problem.
Refinancing Your Loans
Another way to potentially lower your debt costs is refinancing your loans. You don’t always save money by refinancing loans, but for some people refinancing can save a significant amount of money. You can get $100 cash bonus from Commonbond if you refinance your student loan through a special partnership with Fortunate Investor. Or get great rates on a personal loan from SoFi.
Usually you save money by refinancing if interest rates have dropped, your credit score has improved, you simply didn’t shop around for the best rate or if you can now afford to repay the loan over a shorter time period.
The best way to figure out if refinancing will save you money is by running the numbers. First, add up all of the remaining payments on your current loan. Next, add up all of the payments, fees and other costs necessary to take out a newly refinanced loan and pay that loan off in full. If your newly refinanced loan calculations result in a lower total than your old loan, you’ll save money over the period of the loan.
What to Watch Out For
Refinancing to save money isn’t that simple, though. In order to achieve a lower total cost, you may have to take out a significantly shorter loan. Shorter loans usually result in higher monthly payments. If you can’t afford the new monthly payments, refinancing doesn’t make sense.
Additionally, if the loan in question is a low interest rate loan and you have much higher interest rate credit card debt to pay off, you may save more money paying off a different debt. Refinancing a small loan that results in a higher monthly payment but not much interest savings may not a smart move if you could be using the money from the higher monthly payment toward paying off other higher interest rate loans like credit card debt.
Consolidate Your Debt
Consolidating your debt is another possible way to save on interest costs depending on your current debt situation. You may be able to use a consolidation loan, personal loan or even home equity loan to consolidate your debt to a lower interest rate.
Consolidation and personal loans usually have a fixed term, unlike credit cards and other revolving credit lines. This fixed term might result in a higher payment. That said, it could also result in lower interest costs and more principal being paid down each month.
What to Watch Out For
Consolidating your debt can be extremely dangerous. Freeing up your credit lines on your credit cards may result in even more debt if you don’t have your debt problem under control. Consolidating your debt often gives up the flexibility you have to make payments on debt like credit cards. You have to make your full loan payment every month with a consolidation or personal loan while you only have to make minimum payments on credit cards and balance transfer offers.
Sell Your Asset and Buy a Cheaper One
You can tell who is really serious about paying off their debt using this method. People who just like the idea of being loan free would never consider this method to help pay their loan faster. That said, those that truly want to be debt free will at least give a good bit of thought to this method.
If you have an asset you used a loan to buy, such as a house, car, RV, motorcycle or boat, and you aren’t underwater on the loan, you can sell the asset and pay off the loan in full. Then, you can take any money left over from the sale and buy a cheaper version of that asset. Another option that may make sense is using the money from the sale to pay off other loans.
What to Watch Out For
Sadly, you can’t always use the proceeds from the sale to pay off other debt. After all, you need a place to stay and a car to get to work. In some cases, you may not have enough money left to purchase a new car with cash. Do your best to keep any new loans as small as possible so you can pay off other high interest debt.
On the other hand, boats, motorcycles and RVs aren’t needs in 99% of families, so that money can be re-purposed if you have any left after paying off the associated loans. You’ll lose the entertainment option so you’ll need to make sure you have other cheap or free entertainment options lined up that won’t balloon your budget before making the sale.
Actually Pay off Your Debt
This last method works both by itself and along with the other methods listed above. Actually paying off your debt is sometimes the best way to lower your interest costs. Sometimes your debt already has the lowest interest rates possible and refinancing or consolidating won’t help. Other times, the amount of debt and interest isn’t worth the hassle of going through a balance transfer. No matter what the reason, paying down your debt will almost always lower your interest costs. Of course, that assumes you’re paying interest to begin with.
To get the biggest bang for your buck, consider paying off your highest interest rate loans first. You’ll be able to pay off your debt faster if you can put more money toward principal payments every month. This is the main way my wife and I paid off over $80,000 of student loan debt in 3 years. We didn’t go through any of the methods listed above. Part of the reason was many of the methods weren’t available to us. Even if they were, they wouldn’t have resulted in any interest savings.
What to Watch Out For
If you’re using the other methods above, actually paying off your debt is one of the most important steps. If you only use balance transfer offers, refinancing your loans, consolidate your debt or sell your asset to buy a cheaper one, you still have a debt problem. The debt problem only goes away when you actually pay off the debt, not when you lower your monthly payments or interest costs. If you don’t accelerate your debt pay off, you risk falling into worse debt issues you previously had.
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