July 2018: Part 1-Debt
Now that we’ve approached 2018’s half way point, this may be a good time to analyze your overall financial picture. This means reviewing items such as your debt, savings, investments and future goals. This month’s article will begin a multi-part series: part one focuses on debt, part two will focus on savings and part three will focus on the tools to protect your assets and liabilities.
If you have not reviewed your outstanding debt recently, then use this article as an overview and a potential starting point to research your outstanding liabilities further. This article will mention the popular rules of thumb and provide some realistic views on those rules, plus suggestions to help you with your outstanding debt(s).
Credit Card, Mortgage, Student Loans, Car Loans
Rules of Thumb- It doesn’t matter how the debt is characterized, the rules of thumb will typically suggest one of the following: find the relative best interest rate for that particular debt, pay down your debt as fast as possible, usually starting with the debt that is charging you the highest interest rate or refinance the debt that has the highest interest rate. Reality- Whether you’re dealing with a single debt burden (student loans for example), or multiple debt burdens that you’ve accumulated, you are obligated to pay off your debt. The major questions are: How do you decide which debt to pay off first? What are ways to lower your potential interest rates? Are there other ways to possibly reduce your debt burden? Suggestions- First, we recommend making a list of all your debt burdens with their respective interest rates, loan balances, monthly payment amount and regularly updating this information. We have developed a template to keep track of your debt and will send you a copy upon request (Click Here). Secondly, we suggest analyzing each one of your particular debts’ interest rate and research whether this rate is competitive for that specific type of debt. If your interest rate for that type of debt is not competitive, you should consider refinancing that debt, making sure you know all the terms of the potential new loan. In reference to student loans, lenders will sometimes offer to refinance your student loans with a lower than average interest rate. While your interest rate has decreased, these lenders will typically extend the timetable of your loan thus possibly costing you more over time. Pertaining to credit cards, financial institutions will advertise low credit card rates. However, the advertised rate is typically for an introductory period, and the rate will normally increase. We recommend paying off your credit card balance before the introductory rate ends. In addition, if you plan to transfer credit card debt, be mindful of the one-time transfer fee they may charge for the transfer. Third, we suggest, that if you have a loan with a relatively low interest rate, pay that loan according to the amortization schedule and allocate any extra debt payment funds to your other debt with a higher interest rate. Collateralization, the act of pledging an asset as security for repayment of a loan, can be a great source for a potentially lower than market interest rate for your debt. Examples of potential assets to use as collateral are homes which can be collateralized through Home Equity Line of Credit (HELOCs) and excess cash which can be collateralized through a CD secured loan. Using your assets as collateral can be a complex process, therefore we recommend consulting with an independent financial planner when considering this option. Finally, do your homework. Before taking on a new loan or refinancing, shop around between financial institutions for the best possible loan terms given your specific financial position and the debt you are considering. Just because you have a checking account at one bank, does not mean you are obligated to have all financial accounts there. Additionally, you should check your credit score for a possible score improvement. An increased credit score can potentially help improve the loan terms on your current or future debt. If you have a poor and/or limited credit history, look into non-traditional methods for developing a credit history. Search for lenders that have special programs for individuals that lack adequate credit. For example, most banks will not give car loans to people with limited credit histories, however some car manufacturers have their own financial institutions which will offer special financing programs for recent college graduates. In the end, the keys with debt are: make sure the interest rate you are being charged is a good rate compared to other financial institutions for that particular type of debt, pay off high interest rate debt first, and make paying off debt a priority. If you need help with any of the topics discussed above, feel free to contact us for a consultation.