Dealing with debt can be stressful and burdensome, but loans are a practical necessity for most of us. We don’t always have enough cash on hand to buy an RV or a house, so a loan with a reasonable interest rate is our only real chance to get what we need. However, it’s important to devise a strategy that allows you to pay your loans off at a feasible rate.
The biggest benefit of paying off loans is negating the effects of compound interest. Even if your loan has a relatively small interest rate, it can add up over time.
For example, let’s say you borrow $10,000 at an annual interest rate of 5 percent. The first year, you’ll owe $500 in interest. If you don’t pay that off, you’ll owe interest on both the principal and the new interest, amounting to $525. If you’re not careful, this can snowball exponentially, ultimately costing you more money in the long term. The faster you pay off your debts, the smaller this effect will be.
On top of that, making payments consistently and keeping your debt to income ratio low lead to a higher credit score, which can qualify you for better interest rates and better loan terms in the future.
Some people even like paying off loans because it makes them feel better about their personal finances. Holding debt can be stressful.
If you’re ready to start paying back your loans as fast as possible, follow these steps:
- Take inventory of your debts, expenses, and income. Before you come up with a plan, gather as much financial information as possible. How much money do you make every month and how much of it is currently necessary to maintain your standard of living? How much do you currently have in debt and what are the most important ones to address?
- Consolidate or optimize your debts. If you have multiple loans in standing debts, look for ways to pay them off efficiently. For example, if you have a $5,000 debt on a credit card with a 28 percent APR, you might be able to pay it off by using a credit card with a 22 percent APR, giving yourself an interest rate break in the process. You can also use debt consolidation services for similar value.
- Negotiate with creditors. Call your credit card company or your lender and see if you can make arrangements for a more convenient payment plan. In some cases, you can even lower your interest rate this way.
- Make significant lifestyle cuts. Eliminate subscription services that you no longer use, cook instead of eating out, and in extreme cases, consider moving to a cheaper location. You can probably save hundreds of dollars per month this way.
- Make some extra income. Fortunately, there are limitless ways to do this in the modern era. Making deliveries, driving other people, making crafts, and creating content are just a few side gigs that could give you extra cash.
- Prioritize your high-interest debt. Since one of your biggest goals is reducing the effects of compound interest, you’ll make more of an impact this way.
- Pay as much as you can (not just the minimum). The extra money you contribute will pay down your principal. If you do this consistently, you’ll gradually chip away at your debts until your balances drop to zero.
Paying off your debts is a massive step forward, but if you want to improve your financial future even further, you need to think about how you treat loans and debts from here.
- Understand that not all debts are equal. Some people use the terms “good debt” and “bad debt” to distinguish between different types. Good debts provide some value to you, such as student loans that grant you an education or a home mortgage that gives you a place to live. Bad debts are unnecessary, like the credit card debt you accumulated when buying your pinball machine collection. Some people also distinguish debts based on interest rate; a loan for an RV with a single-digit interest rate is far superior to your credit card with a 28 percent APR.
- Avoid unnecessary debts. Taking out loans and paying them is good for your credit score, but you’ll have plenty of opportunities to do this with things you actually need. Don’t burden yourself unnecessarily.
- Optimize debts and loans to be in your favor. There are usually many options available to you to secure a better financial position. Can you shop around to find better terms? Can you negotiate with the lender to find a better interest rate? Can you boost your credit score to qualify for a better loan?
Are you interested in getting a loan for an RV? Or do you need help connecting your customers to the financing they need for their dream RVs? Contact us for more information on how we can help today!