Debt

If you have gone through all the previous lessons, you’re now in a great place to renegotiate your current debts and loans if you have any.

That’s because: 

• You have a budget you follow
• You have increased your disposable income
• You spend much less than before
• You have increased your income by asking for a raise

That means you have the ability to pay your debt off faster.

Good vs bad debt

While most debt is bad, there is such a thing as good debt. Good debt is when your loan is helping you make more money somewhere else.

The only good debt most people will ever have is a mortgage, since a home will often increase in value beyond the costs of the mortgage.

Please note that the principles from the lesson about saving on accommodation still apply here. Don’t buy more house than you can afford.

Pay off expensive debt ASAP

If you have debt with an interest rate of more than 5%, prioritize paying it off ASAP. The reason for this is that it’s basically a guaranteed return on your money.

For example, if you have credit card debt with an interest rate of 18%, making extra payments will save you all that interest.

Effectively that an 18% guaranteed, risk free “return.”

Action: Consolidate your debt

The first step is to consolidate your current debts into a single cheaper loan. Doing so can instantly lower your interest rate and you can save a lot of money.

Secured vs. Unsecured Debt

When consolidating multiple debts, the difference between secured and unsecured debt can make a huge impact on your interest rates and overall savings:

Secured Debt: If you have high-interest debts (like credit cards), you might be able to consolidate them into a loan secured by an asset like your home. This reduces the lender’s risk, potentially earns you a much lower interest rate.

Unsecured Debt: Consolidating into an unsecured loan likely won’t get you the lowest possible rates since lenders have less assurance. However, unsecured consolidation can still be a smart move to simplify payments and possibly lower your overall interest compared to multiple unsecured debts.

Action: Know your Consolidation Options

With the understanding that secured debts can offer better rates, it’s time to see if your home equity can play a role in debt consolidation. Use our straightforward Home Equity Calculator to estimate the available equity in your home.

If you do not own a home, SKIP THIS. 

The amount of equity you can access is a key factor in determining if a HELOC or home equity loan could be advantageous for consolidating your higher-interest debts.

Step 1: Estimate Your Home’s Value

• Visit Zillow’s website.
• Enter your home address to find the estimated market value, also known as the “Zestimate”.
• Input this number into the “Home Value (from Zillow)” field in your Home Equity Calculator.

Step 2: Calculate Potential Loan Amount

• Your calculator will automatically fill in 80% of your home’s estimated value as the “Maximum Loan Amount” in the next field.
• This figure represents the typical amount a lender may offer for a home equity loan or HELOC, adhering to standard loan-to-value ratios.

Step 3: Current Mortgage Balance

• Refer to your most recent mortgage statement to determine your current outstanding balance.
• Enter this amount into the “Current Mortgage Balance” field of the calculator.

Step 4: Determine Your Available Equity (potential loan amount)

• The “Accessible Equity” field in the calculator will automatically subtract your current mortgage balance from the maximum loan amount, revealing the equity available for borrowing.

Step 5: Assess Borrowing Viability

Now that you have calculated your accessible equity using the Home Equity Calculator, it’s important to understand what this number represents.

The accessible equity is essentially the amount you can potentially borrow against your home, which serves as collateral. This is the value lenders will consider when you apply for a home equity loan or HELOC.

• Compare the accessible equity to the total outstanding balance of your high-interest debts. This will give you an idea of whether you can fully cover these debts by borrowing against your home’s value.

Action Steps for Those Without Home Equity

If You Don’t Own a Home or Lack Equity

If you don’t own a home or don’t have enough equity, don’t worry! There are still plenty of actionable steps you can take to manage and reduce your debt effectively.

Action: Explore Debt Consolidation Loans

Personal Loans: Look into unsecured personal loans offered by banks or online lenders. These loans often come with fixed interest rates that are lower than credit card rates, making them a great option for consolidating high-interest debt.

1. Research Lenders: Start by researching reputable lenders. Look for those offering competitive interest rates and favorable terms.
2. Check Your Credit Score: Your credit score will impact the interest rate you’re offered. Ensure your credit report is accurate and consider improving your score if necessary.
3. Compare Rates and Terms: Use comparison websites to evaluate different loan offers. Pay attention to the APR (Annual Percentage Rate) and repayment terms.
4. Apply for a Loan: Once you’ve found a suitable lender, complete the application process. Be prepared to provide documentation such as proof of income and your debt details.
5. Consolidate Your Debt: If approved, use the loan funds to pay off your high-interest debts. This simplifies your payments and can lower your overall interest costs.

Action: Negotiate with Creditors

Lower Interest Rates: Contact your creditors directly and ask for lower interest rates. Many creditors are willing to reduce rates if you have a good payment history.

1. Prepare Your Case: Gather information about your current financial situation, including your income, expenses, and debt details.
2. Contact Creditors: Call your creditors and explain your situation. Be polite but firm in requesting a lower interest rate.
3. Highlight Your History: Emphasize your good payment history and your commitment to paying off your debt.
4. Document Agreements: If a creditor agrees to lower your rate, get the agreement in writing. This ensures clarity and serves as a reference if needed.

Action: Utilize Balance Transfer Credit Cards

Balance Transfers: Many credit card companies offer promotional 0% APR balance transfer cards. These can be a powerful tool if used correctly.

1. Research Offers: Look for balance transfer credit cards with long 0% APR promotional periods and low or no transfer fees.
2. Check Eligibility: Ensure you qualify for the card by checking your credit score and the card’s requirements.
3. Apply for the Card: Complete the application process for the chosen card.
4. Transfer Balances: Once approved, transfer your high-interest credit card balances to the new card.
5. Pay Down Debt: Focus on paying down as much of the balance as possible during the 0% APR period. Avoid new purchases on this card to keep the balance manageable.