When you Start to understand the whole idea of finance it’s not all about making money. An equally important part to your financial wellbeing is understanding the debt that you have. Only then will you be able to overcome that debt in the most efficient way.
Here is the video if you prefer, but read on for detailed content.
Types of Debts
In order to Pay off Debt, we have to first understand what type of debts are there. Looking at the main four types of debt we have Secured, Unsecured, Revolving, and Installment.
Secured Debt – is when you have to put up collateral in order to receive some type of cash. The most known form of this is a car loan when the bank gives you some money to purchase a vehicle. But if you fail to make the payments they will repossess the car in order to gain back the money lost.
Unsecured Debt – This debt will not have any type of collateral and is simply tied to the borrower’s agreement to pay the money back. If the money isn’t paid back they will likely be taken to court or taken to collections. Popular forms of this debt are credit cards and gym membership contracts.
Revolving Debt – this is like a line of credit with someone. Credit cards use this type of debt because it allows you to spend up to a certain amount set by the lender. This is also something that happens periodically meaning that a relationship is formed.
Installment Debt – This is debt that is repaid over a fixed amount of time. Mortgages fall into this category because you make installments each month over either a 30 or 15 year time frame.
How to Pay it Off
Now that you can categorize your Debt. We need to learn how to chip away at it. If you Google how to pay off your debt, a lot of different sites will come up all with the same answers. I am going to give you the real way to pay it off faster than normal. The steps that lenders don’t want you to know.
The first tip would be to Pay More than the Minimum. This can be a few extra dollars each month. When you do this the extra money goes directly towards the principal. Those extra principal payments will take away the future interest that you would have had to pay. Thus saving you more money in the long run.
When you are comfortable with paying more than the minimum then you could start making More Than One Payment Each Month. This has the similar effect of extra principal payments. But what this also does is helps build your credit score since it will show extra payments at the end of the year.
Some people like to Pay Off the Most Expensive Loan First. This is similar to what people like to call the snowball method. When you pay off your most expensive loan then it is almost a cakewalk to pay off the other smaller loans.
This last tip is called Debt Consolidation. They will take all of your loans and lump them together so all you have to do is pay one monthly payment with usually a small interest rate.
Which Debt to Pay Off First
A Lot of people have questions when it comes to which Debt should they start paying off first. There are a couple of different ways you can answer this question. The easiest being, it depends on the person and the individual situation.
You could pay off the one with the Highest Interest first. This will allow you to save more money over time as you wouldn’t have to pay the interest that will occur over the span of the loan.
Some people like paying the Smallest Debt off first, this helps them get in the groove of paying debt off. And once that ball gets rolling it’s easy for them to pay off the rest of the debts they have.
If you are looking to make a big purchase in the near future then you might want to pay the debt that Affects Your Credit Score the Most. This will free you up to qualify for any new loans you might need in the future. This one is more of a long haul way to pay your debt off so definitely make sure you have the motivation to stick to it.
Debt Snowball Method
The snowball Method of paying off your debt was something that was made popular by Dave Ramsey. This method allows you to pay off your debt strategically by targeting the smallest debt first.
You list your debts from smallest to largest regardless of interest rate. You then make the minimum payments on all of the debts except the smallest one. You will then pay as much as possible on your smallest debt. Once the smallest debt is paid off you take that money and put it towards the next smallest debt. You will repeat this method until you are debt free.
Rob’s Opinion
As you can see there are a lot of different ways to tackle debt. The most popular being the snowball method. When you take control of your debt, you are freed up to be able to do more things with your money such as invest or splurge. I hope this blog has been helpful, send it to someone who you know could use this valuable info.
