Eliminating debt

Your first goal while trying to improve your economy should be to elimenate expensive debt. High interest debt can cost you a lot of money and have a negative effect on your networth. All money that you pay in interest is money that you could be saving or investing. Once invested this money could earn you more money.

A lowered net worth and less money to invest is not the only negative effect of debt. In the short run it is not even the most negative effect of debt. The most dangerous effect of debt is the damage it does to your cash flow. The money you need to pay to your debtor each money is money you otherwise could spend on other things. The cost of the loans can make it difficult to make the money until the next paycheck arrives. You might be forced to take new loans that you would not need if you didnt allready have debt. Expensive debt can quickly become a negative spiral and some more predatory loan companies such as some pay dya loan companies expect you to fail to make your payments. They expect you to be forced to take new loans. This will turn you into a loyal profitable customer for the payday lender.

Your first goal should be to lower the effect your debt has on your cash flow. Once you have imrpoved your cash flow you can look to eliminate your debt all together.

Unify all loans

Small loans are expensive. Larger loans is a lot cheaper. This is due to the fact that the administative costs remains approximately the same for all consumer loans. This allows you to save money and improve your cashflow by taking out one big loan to pay of all smaller loans. There are many lenders that offer this type of loan. They might be willing to give you a loan even if you allready have a lot of debt due to the fact that they know that the loan will be used to eliminate old debt.

Calculate how much it would cost to completeky pay of all your high interest rate (mortgages are not included) and then contact a suitable lender to see if they are willing to borrow you the money. Converting small loans into one big loan have several benefits.

  • Lower interest rate: You will usually get a significantly lower interest rate if you convert your debt into one singel loan. You will often save hundreds or even thousands a year.

  • Smaller monthly payment:. One single loan can be repaid over a longer period of time than many small loans. You can often choose to repay the loan iin 5-10 years. This is a lot longer than most smaller credits. You can often cut your monthly payment in half or more by coverting all your debt into one loan.

  • Easier administation: It is a lot easier to keep track of and make one payment a month than it is to make sure to remember a lot of different payments.

  • Easier to repay early. You do not have to consider which debt to pay of early. You simply make extra payments on the one single loan.

Converting your debt into one single larger loan will improve both your cash flow and your future net worth.

Repaying your loans

From here on we will assume that you were unable to convert your loans into one big loan. If you did convert loans then it is very to repay your loan. Simple use any extra money you got to make an extra payment on your debt.

Knowing the best way to pay of your debt is a lot harder if you still have a lot of smaller loans. If you have a lot of small loans then you have to consider when to pay extra on which loan.

The most important rule when repaying your debt is the NEVER spread money over several different loans. Always focus on one loan at the time. Make an extra payment on that loan every time you have extra money. Keep focusing on that single loan until it is paid in full. Then and only then can you start paying extra on an extra loan. Focusing on one loan extra will give you the best results and allow you to fully eliminate a monthly payment faster. Spreading the extra payment over all loans will have a smaller impact on your monthyl payments.

There is no exception from this rule. Allways focus on one loan at the time. The question is which loans you should focus on first. To determine this you need to make a list of all your loans, how much is left to pay and the interest rate of each loan. Also include any monthly administrative fee that the lender might charge you to send the bill. Once you have this information you are ready to determine what loan to focus on first. ‘

There are two main techniques that can be used to decided which laon to focus on. One method focus on efficiency the other on motivation.

Effecient method

This method focuses completely on making sure that you pay of your loans in the most efficient way possible. This method assures that you bemcome debt free as quickly and cheapely as possibly. If you want to use this methof then you should arrange all your debts in order of cost. Place the loan with the highest interest rates (administrative fees included) on top of the list and then continue down the list until you hace sorted all loans according to cost.

Please not that the cost is not the monthly payment. It is the interest rate plus administative fees. A US500 loan with a 20%APR is more expensive than a 100 000 loan with a 10%APR even if the monthly payment is larger for the larger loan.

Once you have your list you should start by paying of the most expensive loan regardless of size. Start paying on the second most expensive loan once the most expensiove loan is eliminated. Every tiime a loan is eliminated your monthly expenses will lower. I recommend that you use all the money you free up to pay of the other debt quicker. Avoid using this money for anything else until you have paid of all your debt.

This method is the best method to use but it can be hard to stay motivated if the most expensive loan is a large loan.

Motivating Method.

The motivating method focus on allow you to see quick results. This will keep you more motivated and might make you mor elikley to succedd in eliminating your debt even if you will spend more money doing so than you would use if you use the most efficient method.

If you want to use the motivating method then you sort all your loans in order od size. You start by focusing on paying of the smallest loan,. This allow you to eliminate one debt as quickly as possible. It allows you to see quick results. Once the first loan is eliminating you move on to the second largest loan.

This method is less efficient than the method above and it takes more time to become debt free. This method is despite that often the best because more people stay motivated and eliminate their debt using this method.

Use the method you think will work best for you,

The hybrid Method

A good compromise can sometimes be to use the hybrid method. This method focus on motivation and efficiency. You will need to make to list. One where you list your debt according to size and one where you sort it according to cost. Start by paying of the smallest loan to get a wuick win. Once the smallest loan is paid of you move over to the other list and start paying of the most expensive loan tobe more efficient. Once the most expensive loan is paid in full you move your focus to the smallest remaining loan. You jump between the two list like this until all loans are repaid in full.