Signing a home loan and getting into debt.

Yes This Really Is Debt

When most people think of the word debt, the first thing that generally comes to mind is credit card debt. Indeed, credit card debt is the worst kind of debt but there are so many more forms of debt. Take a look at the top three other kinds of debt that many people just consider normal.

Is there really such a thing as good debt? Not if you are paying interest on it. It can be argued that 0 percent interest deals can be good debt because you actually make money because of inflation. That being said, those deals are usually full of all kinds of potential money hazards.

Let’s take a look at 3 kinds of debt that people often forget about or write off as good debt. Then, we will tell you how to get rid of it.

1) Home Loans

The path to home ownership is almost always through a home loan these days, which makes people assume that it is just normal to have the debt. That complacency makes people choose long 30 year loans where they will end up paying double the price of the house in interest.

A home mortgage is debt just like any other debt and you should work on eliminating it. Now, obviously you would want to eliminate higher interest debt first, but once you do, you need to attack that mortgage. Here are some ways to do it.

  • Make bi-weekly payments.
    Most of us get paid every two weeks, so why pay your mortgage just once a month. Break up your mortgage into two payments and make a payment every two weeks. By doing so, you will be making 13 full payments a year instead of 12.
  • Refinance to a shorter term.
    If you originally bought on a 30 year term and have been paying for a few years, refinance to a 20 year term. A 20 year loan will likely have a lower interest rate, which will make the payment increase minimal. What you will do, however, is shave years off your mortgage.
  • Use windfalls to pay down principal.
    If you get a big tax return or bonus from work, use part or all of it to pay down the principal on your loan. This is particularly important in the beginning of the loan. 3000 dollars paid down now is 3000 dollars that you will not pay interest on over the next 20 years.

2) Student Loans

This is another loan that people just put on auto pilot. They graduate, set up auto payment and just consider that student loan a normal part of life. A loan drawing interest for 10 to 20 years is nothing to glance over however.

Just like with a home loan, you should attack higher interest debt first. Once that is gone however, it is time to look at your student loans. Here is how you can attack the debt.

  • Refinance them.
    If you have good credit, you may be able to refinance your loans at a lower interest rate. You can then take the money that you were wasting on interest and apply it to principal.
  • Get a side job.
    If you are young and just starting out, you likely have a lot of free time as well. Pick up a weekend gig and eliminate that debt fast. Even one shift of part time work a week can put 500 dollars in your pocket every month. That is an extra 6000 dollars a year that you can use towards credit card debt.
  • Use found money.
    Unexpected money can go a long way towards paying down your student loans. If you receives an unexpected inheritance or perhaps won a couple hundred dollars in an office pool, why not use it to pay on your loan principal. Every dollar counts, especially those paid on your loan early in the term.

3) Auto Loans

Purchasing a car is one of the worst investments that you can make. Of course, we need a car though don’t we. At least most of us do. The problem is that people just buy way too much car.

Year after year, the average purchase price of a vehicle goes up. This is not due to inflation it is due to the fact that people keep buying bigger vehicles with more features. Most figure that they are always going to have a car payment, so as long as they can make the payment, it doesn’t matter.

If saving is your goal however, a big car payment on a loan with a long term is the enemy. Here is how to get rid of it.

  • Sell it.
    If you have equity in your vehicle, selling it and moving to a cheaper vehicle will get you back on track. Should you have enough equity to purchase a vehicle outright, do so. If not, choose a new vehicle that will allow you to get into an affordable and smart 3 year loan.
  • Refinance to a shorter term.
    If you originally took out a 5 year loan and have paid off some of the principal, consider refinancing to a 4 year or even a 3 year note. Just switching from a 5 year note to a 4 year note can save you 1200 dollars or more in interest.
  • Keep it.
    Let’s say that you really like your car and it is in good shape. Another option is to keep it, really keep it. Pay off the vehicle and then do not trade it in on a new one. Vehicles these days are lasting much longer. It is not uncommon to see well kept cars driving for 10 to 15 years, trouble free.

 

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