Many of us have not just many loans, but different kind of loans. So how do you go about the process of paying them all off? It’s a struggle between interest rate and cash flow. Cash flow is necessary to keep from borrowing again, and will help prepay other loans. But paying down high interest rates will get you more for your money. Here are some things to think about.
Payday advances: Don’t even think about rolling them over. Go to your nearest credit union (nearly all areas have one) or bank and get a consumer loan for the same amount. Whatever interest rate they charge you, it will be less than the annualized rate of the payday loans.
Lack of savings: If you don’t have any cash savings put away, then you have borrowed too much from yourself. Everyone needs an emergency fund to make purchases with expensive emergency debt unnecessary. If necessary, sell some luxury items to develop a nest egg of at least $1,000. Then add a small amount automatically at each payday.
Personal loans from family and friends: At least make payments on these. When times are tough you need people to back you up, and owing them money doesn’t help. Plus, if you show them you’re serious, they make look for ways to help you move forward such as working off the debt or casual employment opportunities.
Same as cash financing: These contracts nearly always expire, and the later rates can be trouble. Look to pay these off first, and avoid making the contract if you can’t pay it off in time.
Credit Cards: These are the most obvious choice. They generally have the highest interest rate. Zero interest rates are often time bombs that will expire. Plus, the minimum balance goes down as you pay them off, opening up cash flow.
The downside? They’re all too easy to charge up again. If you have a lot of debt, consider transferring it to credit card deals that don’t expire. Often cards that you already have will offer perhaps 3% or 4%. Bite the transfer cost, put it on automatic debit, and leave it there. New purchases are often at a much higher rate, and you’ll be less tempted to use them that way.
Secured debt: Do you really need what’s behind these loans? If you’re hard up for cash, it might be better to sell them or downgrade. Save that flashy new car as a reward for being revolving-debt free.
Student loans: These are tricky. If you were able to refinance them at a very low rate, pay the least amount possible indefinitely. If not, look at allocated some prepayment for the long term. Don’t beat yourself up about them, for it will take a long time for your earnings to increase enough for your education to pay for itself.
Mortgage: It’s tempting to pay off your mortgage early, especially in the early part when you’re paying mainly interest. But unless you have a variable rate mortgage, it’s not likely to help your cash flow at all. Furthermore, mortgages are generally one of the lower interest rates you have. So unless you are close to ending your mortgage insurance and refinancing don’t bother.