For most people, taking out a loan is the best option to purchase a big ticket item. Whether it’s a house, a new car, an investment on education, or simple credit card transactions, sometimes borrowing the money makes the most sense. However, all debt is not created equal and they shouldn’t be treated as such. By prioritizing your loan payments, you can actually save money and increase your credit score.
First understand the underlying terms and conditions. Some questions you should ask yourself before borrowing are:
• What’s the APR on the loan or credit?
• How long is the life of the loan?
• What type of interest rate is it, fixed or variable?
• Does the repayment fit into my budget?
Once you understand what you’re working with you can focus on prioritizing the repayment of your loans. My advice to you is to leave your long term investments like mortgages and student loans for later. Interest rates are usually relatively low and allow you the opportunity to increase the age of your credit history.
Save yourself some money by focusing on the bad debt like credit cards. Credit cards normally have ridiculously high interest rates that can quickly get out of hand and cost you a lot of money. If you’re carrying too much credit card debt, you’re probably overspending and should seriously consider creating a budget.
If you can avoid a car loan altogether, I’d go with that. But, if you’re carrying a car loan, I’d focus on that next. Realistically though, the technology in vehicles has advanced so much that you can purchase a 5-10 year old car at a relatively modest price and still get some great features. Don’t forget, we’re in 2016, consider the technology and reliability we already had a decade ago.
A good technique when repaying your loans is to throw a little extra towards the one with the lowest balance. This is a great way to get ahead on the payments and save on the interest. In addition, you can focus on bringing one loan to a zero-balance and you can repeat this process as frequently as you need to.
Life Hack: Even though car insurance isn’t a loan, it’s one of the longest lasting forms of debt you might carry. This shouldn’t be a priority by any means, but some insurers offer discounts when you pay your quote in full. So if you’re able to do so, save a few bucks and go for it.
Fact is, most of us need to take out a loan to acquire some of the things we need or want. The important thing is to effectively manage your debt in a manner that allows you to minimize losses and simultaneously work towards becoming debt free.