Paying down your debt (part 3)

Considering interest rates first

As we just began to touch on in the previous section of this article, don’t pay off the small loans just to be rid of them. Getting rid of several small balances might make you feel better at first, but take a closer look. Getting rid of the small potatoes is not a bad idea, but financially speaking it is not the best idea. You need to consider interest rates first. If the small loans have low interest rates, then you will get rid of your overall debt faster by putting the money you would use getting rid of them into paying off the loans with higher rates. Pay off the high interest loans first! This will save you a lot of money in the long run.

It all adds up

In the beginning, you may notice that you have only a ten dollar a month extra amount of cash once you have accounted for all your required minimum credit card payments. Still – put it towards the debt in the far left column f you debt worksheet you created in the first part of this article. In a year you will have accomplished 2 things. You will have paid down the highest interest loan by an extra $120 (remember the extra ten bucks you had a month?) and you will have accomplished a difference on your other loans by making the minimum payments.

Quite honestly, you may have paid off one or two of your small loans that had lower rates of interest as well. If so, use the money you would use if you still had those payments and use it towards the loan with the highest interest rate. Are you getting the picture here? This is progress and you will see it on your chart. You just have to remain dedicated to getting rid of your debt. Don’t spend the money you have left over from not having those low interest rated loans – use it towards paying off the remainder of your highest interest rated loan.

Be aware of compound interest. It is the interest you pay on interest earned or owed. Savings accounts grow faster if you do not take the interest out – it will earn interest on the interest if you leave it alone. But, if you have a loan where you do not pay at least the total interest that is due each month – you won’t ever pay off tat loan if you think about it.

Pay off strategy

Here is a great example of how you can use strategy to pay off your loans while considering interest rates. Say you have a total of six hundred dollars a month to use in paying your loan payments. You have a car loan that has an interest rate of 9.5% and the monthly payment is three hundred fifty dollars. You also have a credit card that carries an 18% interest rate with a monthly minimum due of two hundred dollars. You additionally have a student loan with an 8% rate and the minimum you have to pay on that loan each month is twenty five dollars.

The best thing for you to do in this case is to pay the student loan minimum of twenty five dollars, pay your $350 car payment and use the extra $25 from your monthly bill budget towards your 18% credit card that revolves. Are you starting to understand what this article has showed you through its chapters? Any extra money you have in your budget needs to go towards paying off the highest interest loan (not to mention it revolves).

SO, once the 18% card is paid off (and it will get there because you are paying more than the minimum due), you can use the extra $225 you have each month to pay more towards your car loan. You will be paying $575 towards your car payment and end up eliminating the loan way ahead of time. Stay with the minimum on your school loan until the car payment is aid off. Then, you can pay off your school loans at a rate of six hundred dollars a month. Think of the impact this will have on your long term goals and retirement! You just have to stick to these recommendations and remain dedicated to paying down you debts. You can do it.

Part 4...

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