Debt Repayment Plans That Don’t Work

There are a million people out there telling you how to pay off your debt. You have to consider your personal spending habits and reasons before you are able to make a debt repayment plan that works for you.

For many it takes a combination of different methods to find a formula for success. Getting out of debt is a wonderful goal, but often in desperation it leads to many mistakes. And these mistakes can end up costing you more in the long run.

There are a few methods you should avoid. Many experts will tell you to go ahead and take out a home equity line of credit or loan to pay off your credit card debt, especially if they want you to borrow from them. It’s not a good idea.

Credit card debt is unsecured debt. There are no assets that can be taken if you fail to pay them like your car, home or belongings.

A mortgage, equity loan or line of credit is a secured debt. If you don’t pay you will lose your home.

You should also avoid using a 401(k) loan to pay off your credit card debt. Your contributions to your 401(k) are not taxed. So when you pay yourself back you are using after-tax money, but you are still losing money.

When you take money out for retirement, you will absolutely be taxed for it again. Not a great financial move.

So don’t use your home or your retirement as a way to bail yourself out of debt. Remember the tried and true is always your best bet. Create a budget, spend less, pay more on your debt, negotiate with your lenders and work hard.

Some Of The Best Debt Repayment Plans

Mary Hunt is one of the top financial-guru’s of our time. Here are her top four recommendations. What sets her apart from all the other authors is that she conquered those same staggering debts in her own life

No more new debt and this should be self-evident. No debt payoff plan will work, not a one of them, if you’re taking on more debt.

If the debts you’re currently paying have declining minimum payments, you must pay the same amount every month until those debts are paid. Disregard any declining minimum payments.

Keep paying the same amount towards the debt, or more if possible, month in and month out. After a few months, you’re accomplishing exactly what financial pros advise: Always pay more than the minimum.

List your debts according to “duration until payoff” (balance plus interest, divided by payment). The debt with the shortest payoff time goes at the top. From there, list each debt in ascending order, by duration until payoff.

Now rearrange your debts in order of smallest “duration until payoff” to largest. This is the order in which to launch your torpedoes and start sinking those debts.

Another occurrence of the snowball method of debt payoff is to compound your payments. When you pay off one debt in full, take its monthly payment and add it to the payment of the next debt. When that debt is paid off, take its payment money and add it to the next payment and so on.

Learn To Make An Informed Decision

Every day people look for personal loans. There are many reasons people seek guaranteed personal loans. Perhaps they want to fund a new business, and do not want to go through small business loans.

Perhaps they are looking to consolidate credit card debt. Or perhaps they want to put a new addition on their home. Whatever the reason, personal loans and their advertisements are popping up everywhere.

What you need to do is learn how to find the best possible loan for you. The great thing about personal loan information is that there are many options out there for getting the information to you to make an informed decision.

Where To Start

Absolutely do not go with the first loan company you find. You need to take the time to find a personal loan comparison guide, and compare many companies. This will ensure that you get the best possible loan.

Next thing you want to compare is the interest rate. Get quotes from several loan companies and keep track of who quoted what rate. Keep in mind that when you close the loan, the amount of interest could change, but the quote gives you a good basis.

Look at the services offered. You might find that one particular company has the best loan repayment plan, for example. Are there policies in place if you have an emergency and cannot make your payment? Keep track of all of these things as well.

Check into the fees the loan carries. Some loan companies tack fees onto their loans. This is often done to make up for lower interest rate. Use online loan calculators to determine the total cost of fees and interest. You might find that a low interest rate is not always the best, because of the fees.

Knowing The Different Types Of Personal Loans Will Save You Money

Many people choose to go with secured personal loans. In order to receive a secured loan, you must put something up as collateral that the lender can take if you fail to repay. A house is usually used as collateral in these types of loans. Low interest rates and fees also accompany a secured loan.

Unsecured Loans

Next is the unsecured loan. These do not require collateral. However, you pay for the lack of security with higher interest rates.

If you have had bad credit, then look next at unsecured bad credit loans; they might be an option for you. Expect to pay an extremely high interest rate for this form of loan, since all the lender has is your promise of repayment.

The Internet can be a great source of information. You may be able to apply for online personal loans. Before choosing an online vendor, make sure they have a good reputation. A good indicator of the legitimacy of the online lender is if they have a brick-and-mortar address.

As you can see there are many ways to save money on personal loans. First, do your homework on individual companies to understand their policies and services offered in small print. At first sight it can appear too good to be true and usually is.

And last the type of loan you qualify for will make a major difference in the money you save. This has to do mostly with your past choices and decisions. However, if you are aware of the rules before hand you have the time to work on your position before applying.

When applying for mortgages, there are so many new and strange terms that it is easy to get lost in the vocabulary. It is always good to do a little research on your own of terms that seem unfamiliar or confusing. But, also remember that you can always ask your lender or loan officer to define these terms. Some terms that may seem unusual and strange to you are front end and back end ratios.

Front end ratios are ratios that show what portion of your income will be made in monthly mortgage payments. They include the principal, interest, taxes and insurance which is sometimes referred to as the PITI. This can be calculated by taking your annual income and dividing it by twelve (for the twelve months of the year). You then take your monthly house payments and divide it by your monthly income. This will give you a percentage.

This percentage will be your front end mortgage. For example, if your annual income is $60,000 we would divide that by twelve to get your monthly income of $5000. If we know that your front end ratio is 31% we can then multiply the two numbers to find that your monthly mortgage payments would be $1550. Most lenders would like this ratio to be 28% or lower but it does depend on the lender.

Back end ratios deal with your total debt payments every month.It is also known as your debt-to-income ratio. This includes mortgage payments, credit card debt, car payments, child support and other loan payments. The back end ratio can also be determined very easily. After adding up your entire monthly debt payments you then divide the sum by your monthly income. That number is then multiplied by 100 to give you a percentage or your back end ratio. Now let’s plug in some real numbers to see how it works.

If we use your monthly income of $5000 and say that your monthly debt payments is $2000 then it is simple to find your back end ratio. We would divide $2000 by $5000 and then multiply the 0.40 by 100 giving us 41%. Now keep in mind that again most lenders do not want this ration to exceed 36% but it does depend on the lender. It mainly depends on what area of the country you live and what the cost of living is for that area.

The reason that your lenders will be very interested in the front end and back end ratios is because they want to make sure that you do not default the loan. By not exceeding the 28% or 36%, you should have no worries and be able to make your payments with ease. If you have any concerns about having a front end or back end ratio being too high, talk to your loan officer about it.

It may just need to be put off for a few months until that ratio can be lowered a bit by paying off a credit card or eliminate other forms of debt. Just make sure you have an open attitude when it comes to determining these ratios.

How Does One Determine Where To Put Their Money First?

This has been an old question from the past. Should you be putting money in savings or investments, or paying off a loan? This is one of the most frequently asked questions that are asked at financial offices throughout the country.

The best way to narrow this down is to examine your debt and separate your good debt from the bad debt. You ask, is there such a thing? It is almost always a good idea to get rid of credit cards and other high interest loans before you set aside cash.

However, it is paramount not to accelerate payments on your mortgage or student loans at the expense of increasing your savings or retirement. This is what we call good debt. We will examine more on this later.

First Step Is To Pay Off Your High Interest Debt

If you have high interest credit card debt, pay that off first. It does not make sense to keep paying that high interest rate and try to save pennies at the same time. You would have to make more than 20% after-tax return on stocks, bonds or mutual funds to make them a better investment than paying off credit card debt.

There is one exception to this. If your employer offers a 401k plan and matches your contribution, fund it up to that level, even if you have credit card debt. This is because you are getting a 100% return on your investment.

Second Step Is to Identify The Good Debt

It is usually not a good idea to pay off your home mortgage unless you have a lot of extra cash. Uncle Sam refunds part of your interest payment if you itemize your deductions on your tax return. Use your money instead to invest in liquid assists.

Do not be in a rush to pay of your student loans either. Qualifying interest on student loans can be written off no mater how long it takes to pay off your loans.

You can ease the burden of repaying your loans. Thanks to recent legislation, you can now shop round for the best terms. For example, lenders may offer a rate reduction if you choose to have your loan payment automatically deducted from your bank account.

And some lenders will knock more off your rate after 24 or 36 months of on-time payments. Also, you can often save quite a bunch of money by looking into consolidation of your loans, which is also a good idea.

Third Step Is To Try Saving And Investing

Once you have eliminated your high interest consumer debt, start saving as much as you can. The best place to begin is a 401k plan if you have one. The next best option is an IRA. In addition to putting money into a retirement account, you need cash that is readily available to you in case of an emergency so you do not have to go back and rely on those darn credit cards.

Try to set aside enough money to tide you over for three months if your job suddenly stops. If you have less-than-steady income, such as from a commissioned sales position, a job that has exposure to economic fluctuations, you definitely need a six month cushion set aside for income.

It is best to put it away in a high-yield saving account or money market fund on a monthly basis until you reach the amount you need.