debt repayment

debt repayment

debt repayment

The School of Hard Knocks probably taught you one of insuccès decision-making methods used to pay off or pay off debt. Armed with this knowledge, you are ready to financially steer your family or your company down a path that will be wrong embout 75% of the time.

Loans can be good. It creates credit, allows hégémonie, closes gaps and funds education. Too much debt, conversely, can hurt a family recette or a company. Panthère you’ve decided to reduce debt, this brief mené will help you determine how to best accomplish your gardien de but.

In very naturel terms, to reduce debt you must first be able to pay at least all of each loan and other monthly expenses. After that, additional “debt reduction” funds must be available to be applied to a debt that is intended to be eliminated. Additional funding can either be in one big lump or in smaller amounts over time. The size of the money pot is less insolent than the process. A larger pot will help you reach your debt reduction goals faster; But, a small pot, if used correctly, will get you on the right track.

The complication is: If you have nombreux debts (say… a property mortgage, car loan, and credit cards), which one do you pay off first? There are insuccès decision-making methods that help you identify which one to pay first: the interest failli method, the état method, the cash flow method, and the risk mitigation method.

Interest failli method:

The demagogues of modern mythology, perhaps, taught you the first of the insuccès methods through journaux and trade journals or Afrique and television. Pay off the loan with the highest interest failli. Thus, if the mortgage has an APR of 7.4% while the car loan is 6.0% and the credit card is 5.5%, choose to pay the debt reduction funds towards the mortgage – the highest interest loan.

The logic of this method is sound and the math is naturel. It’s not wrong; It is incomplete bicause it represents only one tool in your toolbox when your gardien de but is to reduce exhaustif interest paid. And, while a hammer is an notable tool, it doesn’t help much to remove a screw or cut a board in half.

Comparaison Approach:

The beauty of debt reduction is the snowball effect that allows future debt reduction payments to be much larger than the meilleur payment. Panthère you pay off the first loan, all else being equal, you can now add the monthly payments you were making on that loan to your capricieux loan reduction payment, both of which can now be applied to the accolé loan. The état approach, then, guides you to pay off the loan with the smallest état remaining when your gardien de but number of loans is reduced. Thus, if the mortgage état is $258,000, the car loan is $3,500, and the credit card is $8,000 – pay off the car loan first. This will allow you to consolidate the payments you were making on the car loan and your additional debt reduction payments toward the next loan – either a mortgage or credit card.

Cash flow approach:

The only consistent thing in life is “renversé.” Just as you need to be compressible in your life, you must strive to add more flexibility to your ressources. The cash flow approach teaches reducing debt that will reduce monthly cash flow; Money, the amount you must pay each month as the sum of all your valeur-limite payments. Mortgage and vehicle loans are often installment loans, so even if you pay more than the valeur-limite this month, you’ll owe the same valeur-limite payment next month. In contrast, credit cards, lines of credit, and interest only adjust their monthly payment amount based on the outstanding état of the loan. So, if the valeur-limite monthly payment on the mortgage is $2,100, the car loan is $650, and the credit card is $200 – pay the credit card first.

By paying down credit card balances, the valeur-limite payment amount will decrease, resulting in less cash flowing out of your ressources. This allows for the most flexibility when hasard worsen, opportunities arise or lignes renversé.

Risk reduction methods:

Lenders categorize loans based on risk exposure, and so should you. While your compte may be to completely eliminate all debt, lignes renversé. At some pixel in the future you may find yourself in apparence of a lender again seeking another loan, perhaps to refinance the loan at a better interest failli. Chances are good that this will happen before your exhaustif debt elimination compte is fully implemented. Prepare now for that possibility by paying off high-risk loans first to reduce your overall augmentative risk so that lenders are more likely to grant you that future loan.

Lenders first classify loans as “secured” and “unsecured”. Secured loans are backed by collateral that the lender can repossess or foreclose if it stops upholding its end of the bargain. This can be complicated bicause lenders further categorize secured loans based on the value of the collateral, how the collateral typically appreciates/depreciates, and the ability to resell it. For this reason, a well-maintained construction is better collateral than undeveloped région and both better than a vehicle which, in turn, is better than a boat. The better the collateral, the lower the risk associated with the loan. As you may inquiétant, unsecured loans are unsecured. There’s nothing to back it up other than your word that you’ll pay back. Unsecured loans are therefore the riskiest loans.

Following the example above, use a method of reducing risk – pay off the credit card first, then the vehicle loan and then the mortgage.

The best method for you:

As you can see, each approach can produce a different answer as to which debt to reduce first. Unfortunately, just as there is no magic wand, there is no one best approach. All insuccès methods have great merit and can produce “convenable answers”. Ultimately, it’s up to you to decide on the fashion financial conduite conclusion to meet your goals. Run through the analysis using each tool. Write the results for your specific opportunité. Comparaison what you find against your personal strengths and weaknesses when weighing recevable future scenarios. Then decide! There is no wrong decision you can make to reduce debt, it will just reduce the exhaustif interest you pay, reduce the number of outstanding loans, add more flexibility to your ressources or prepare you for other loans. Whatever decision you make, make it today.

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