In less than 60 days, the world will change the calendars to 2017. People enjoy shopping for the holidays, going on a vacation with their families, and basically making the most out of the remaining days of 2016. And here you are, worrying about the same financial problems you’ve had last 2015 – your debts.
What’s worse than a debt? A pile of debt. And throwing your limited cash on the wrong debt can put you in a deeper, eternal suffering rather than saving you from it. If you have several debts to think about and you don’t know where to start, all you have to do is to stop, breathe, list down all your debts, and prioritize. With overwhelming interests, late fees, and other penalties in mind, knowing what debt to prioritize and pay off first will help keep your sanity.
Wouldn’t it be a great feeling to jump start into the approaching new year with a little less financial burden on your shoulders? It’s always easy to shout a resounding “yes,” but it would be better to take some steps into clearing your debts.
Good Debt VS Bad Debt
Before being specific in what major debts to prioritize, let’s briefly discuss the difference between a good debt and a bad debt. Good debts are money owed which is meant to boost your financial position. Long-term loans like mortgage, car, and education are considered as good debts, and there’s no need to pressure yourself into repaying these loans ASAP as long as you’re doing well in installment payments.
Bad debts, on the other hand, are debts that don’t improve your financial position, which usually in the form of credit card debt or a personal bank loan. The money owed may be used for an expensive gift for your kid or other short-term needs. Good debts can also turn intro bad debts, when your money management skills failed and made the debt worse. Basically, you should pay off bad debts first.
Three Major Debts You Should Prioritize
Listed here are three debts you should prioritize and other actions to lessen your debts effectively and save more money.
#1 Mortgage and any loans secured against your home
As long as you’re keeping up with the installment, there’s no rush into paying off mortgage loans. But a lot of people take this good debt and turn it into a bad one. The bank can foreclose your beloved home or property if you fall behind on your repayments during the terms, which is the least you’d want to happen.
A recent news shows that mortgage rates are rising slowly. You may consider refinancing your loan if you’re currently battling with a mortgage rate higher than 5% or you’re still paying Private Mortgage Insurance (PMI). Refinancing can extend the life of your home loan but may save you each year, especially if you’re paying for PMI fees.
#2 Car loans
A car loan is another example of a good debt gone bad. It can quickly become a bad debt if you purchase new automobiles and trade them continuously, which will prevent you from saving more money for your retirement and other long-term goals. Like mortgage loan, a car loan is a secured one, and therefore shall be prioritized. Your car can be repossessed by the bank, leaving you with nothing but a broken heart and pocket.
If your vehicle loan interest rate is 6% or above, you might want to consider refinancing. Unlike refinancing your mortgage or consolidating credit card debts, refinancing your car loan is quick and easy, with no appraisal required.
#3 Credit card debt
Though it isn’t a secured loan, it would save your life to have your credit card debt prioritized. Credit card debt is your highest-rate bad debt and the outrageous interest rates are the ones keeping the card debt from going down. In addition, the low minimum payments you think that are helpful are what have kept you in debt for so long.
It’s easy to say that the best move you can make is paying your card debt in full, but we know that it’s never easy to get help. The online loans aren’t meant for such major need. You can either refinance your debt with a low-interest personal loan or transfer the card debt to a promotional 0% balance transfer card.
If you’ll go for a low-interest personal loan, you’ll switch the debt to a three to five-year personal loan and you’ll pay off credit card debt faster with higher monthly payments. The 0% balance transfer card, on the other hand, allows you to transfer your debt to a card that doesn’t charge any interest for a promotional period.
Like other young adults, Carmina Natividad also experiences struggles in saving money, yet she finds a way to become a responsible spender. She shares her views on money issues by being a daytime writer for Speedy Money, an Australian-based business, providing short-term loans and other borrowing solutions.