How to Prioritize High – Interest Debts
It is so easy to get into debts and so hard to pay them off. To some individual, any payment they make hurts. But then why should you borrow when it is painful to repay? The reason why sometimes making a payment seems painful is because you are required to pay not only the principal amount but also the principal amount. Borrowing money can be very helpful in some situations
As a business person, you cannot ignore an investment opportunity with the prospect to earn you thousands of dollars because you do not have the required capital. It is sensible to take a loan and if you are really wise, the investment made can help repay the debt taken. If you really need a certain skill you feel can be very relevant to your career, take a loan if you cannot afford to pay a fee from your pocket. If a home appliance breaks down at the middle of the month, wouldn’t it be wise to borrow and repay or replace it? We all desire to be homeowners. In fact, a recent study shows the reason why most Americans borrow is to buy homes. The decision to take a mortgage can hardly be questioned. What if a medical emergency? Well, one may argue that you need to save for emergencies, in many cases, we are caught offside. The point here is that at one point it may be very necessary to borrow.
Pay Your Debt
While the decision to borrow money can be justified, the failure to pay can never be justified. Indeed, you may face a certain condition that renders you unable to repay the loan in time, it is difficult to be exempted from the consequences of late payment. Even though there are provisions in the law for some debts to be forgiven, not everyone can benefit. Besides, it may take too long before a debt is forgiven. More importantly, there are chances you may need credit in the future and the chances of being approved depend on how you deal with current debt.
It is very important to do the math before applying for a loan. For instance, borrowing money online is always expensive. Only apply when you can afford to repay to make it easier for you check out loans and compare it here Loan Advisor
But as we mentioned earlier, you may find yourself in a very difficult condition. Many individuals have found themselves in what we often refer to as a vicious cycle of debt. This happens when you are completely overwhelmed with payments and you just cannot survive without loans. Irrespective of the condition you are in, you can effectively pay off your debt. How? Continue reading…
How to Prioritize High-Interest Debts
This approach is often referred to as the debt avalanche approach. You only to determine if it can actually work for you. It involves attacking your debts starting from the high-interest ones to the ones with low interest. Unquestionably, this is the fastest and the most appropriate way of repaying your debt.
To apply this technique, you need to first list all your loans and figure out the interest charged on each one of them. With this data, draft a schedule indicating when you are going to repay each one of them. Take note of the following:
- It is important to consider charges that are likely to impact your priorities. For instance, there are some credit cards with yearly charges that can be avoided if you opt to settle them and revoke the card. Remember canceling the card has some negative impacts, such as hurting your credit score. Similarly, some types of loans may be having prepayment penalties and this may mean repaying them off can be less cost-effective compared to settling as earlier arranged with the lender.
- In case some rates of interest are inclined to change, for instance, credit cards with introductory rates, put this into consideration. Your priorities may have to change once the interest rates are changed.
- Always apply effective interest rate whenever prioritizing using interest rates. These are rates that accommodate tax deductions and are often applicable to student loans or home loans. This is because interest payment here is always tax-deductible, meaning, in the end, they may cost less compared to the stated rates.
- Do not neglect minimum payments. Basically, you are concentrating on attacking one debt at a time, starting with high-interest ones. However, you need to protect yourself from the risk of incurring more. Ensure you are still paying the minimum installments on the rest of the debts. Be careful to consider these payments before devoting all your money to settling the target debt.
Always pay the maximum possible on the debt that comes first on the list. This is likely to be either a credit card or a type of personal loan. If indeed you wish to settle all your debt, start by canceling out unnecessary expenses and put the best part of your earnings to the first loan. By so doing, you will gain momentum and quickly get to the next one in the list. Once you have successfully paid the highest interest debt, move to the next one in the list. Follow this approach until you are debt-free.
The Bottom Line
In order to effectively attack your debt, you must first budget for your income. Some people earn what can barely cover their basic needs. It is really important to prioritize your payments. Always begin with your basic needs. You will always have the essential expenses that you must cover every month. For instance, you cannot avoid paying your mortgage, incur on food and transportation, and pay utility bills. If you prioritize such basics, you can at least be sure of surviving. The rest of your income should be devoted to debt payment. It is difficult to determine which debt to first attack.
Even though neglecting some payments can have adverse consequences, some can actually give a leeway. So, you should always arrange your loans and determine which ones to settle first. In this approach, we have discussed how you can prioritize high-interest debt. What if this strategy cannot work for you? Well, there is another approach – Debt Snowballing. This is the opposite of the avalanche approach. How does it work? Let us consider that in our next discussion. Thank you.