At PAX Financial Group, we obviously get a lot of questions about Social Security, estate planning and retirement planning, but we also get asked about debt and liabilities.
- How can you lower rates?
- Are there tricks to paying off debt early?
I always suggest discussing your specific financial situation in detail with a trusted financial advisor but wanted to follow up on some common concerns here.
Liabilities, also known as debts, can play a major role in your long-term financial situation. In some cases, these debts can hinder the success of your investments and overall asset growth because you could be putting a payment toward your investments instead of a loan balance and interest. While there are many different kinds of debt, I want to focus on some of the most common types of liabilities.
Want to get out of debt? Ready for financial freedom? Contact PAX Financial Group to see how we can help.
Student Loans
For many, obtaining a college education is a necessary step for reaching professional career goals. Unfortunately, however, for some, the only way to achieve those goals is through borrowing money through student loans. And while these types of loans traditionally have lower interest rates than some other loan types, they have a tendency to linger for many years because of the low payment amounts, available deferrals and high loan balances. These amounts can increase exponentially depending on the type of college and for those with graduate, law or medical degrees.
Over the course of a college education, there can be many student loans acquired and at varying terms and interest rates. Once your education is completed, you may want to consider consolidating those loans into one monthly payment. Not only could this make payments more convenient, but you could also save money by lowering your interest rate.
Tip: How can I pay this debt off faster? Most student loan companies offer different repayment plans depending on where you are in your professional life, how much income you’re making and other factors. These plans include graduated payment plans, where you start paying a smaller amount monthly and then increase that payment year over year, income-based plans, also known as Pay As You Earn, and standard plans.
There are many more types depending on your provider, but the idea is simple: Pick the plan that works for you, considering the more you pay, the sooner your debt will be gone. If you’re on a specific plan but can pay more each month sooner than you expected, you may be able to save more in interest as well.
Mortgage and/or 2nd Mortgage (Home Equity Loan)
Your home is most likely your largest investment. Because of this, most homeowners don’t have the cash to pay for their home up front. Types of mortgages can vary, with the most common being a 30-year mortgage. This is because a mortgage payment spread over 30 years will make monthly payments much more affordable than a 15-year loan. However, consider this: The amount of interest paid over the life of the loan can be significantly less with a shorter term.
$300,000 mortgage at 4.0% interest
30-year mortgage: $1,432/month for a total of $515,609
In this example, you pay $116,178 more over the life of the loan with the longer term. That’s $116,178 that could have been invested and earning money toward your retirement, your children or grandchildren’s college education, or even that RV to travel the country in your Golden Years. Sometimes making these choices means the difference between buying a “dream home” with all the bells and whistles, or making some sacrifices in order to prepare for the future.
Tip: How can I pay this debt off faster? No matter what the loan term, you can always pay more toward the principal balance of your loan each month. Consider the 30-year term payment example above. If you paid an additional $100 per month toward principal each month, you would shave three years and six months off your mortgage and save $28,746.
Credit Cards
Credit cards can be a great way to pay for everyday purchases and earn rewards, cash back and other benefits. However, interest rates can be very high, and if those charges aren’t paid off each month, those interest charges can be higher than the benefits you receive. The important distinction to make for when to use credit cards is that they should be used for planned purchases with a plan to pay the balance off, rather than impulsive purchases that are likely going to remain as a revolving balance, collecting interest.
Store Cards
It’s safe to say, we’ve all been at the checkout counter and been tempted by the store charge cards – “Save 15 percent today if you apply,” etc. And again, like traditional credit cards, you can use these cards to your advantage if used responsibly. But these cards are also known for extremely high interest rates, which can continue the never-ending debt cycle if not planned for.
Tip: How can I pay this debt off faster? Credit cards are known as “revolving debt,” which means that there is no set time frame for when the debt will be paid off, like an installment or term loan such as a mortgage or auto loan. The best way to pay down the balance is by paying more than the minimum monthly payment each month. Many credit card providers offer payment estimators and calculators to help you determine just how long it will take to pay your balance off using just the minimum payment versus an increased amount.
Auto Loans
Auto loans can be another way to accrue debt. Most auto loan terms range from 24 to 84 months and can make up for a large part of your monthly debt payments. To get the most out of auto-loan financing opportunities, consider taking the lowest amount of financing needed by increasing your down payment. Also, if you don’t travel very often and like to get a new car every couple of years, consider a lease.
Tip: How can I pay this debt off faster? Because car values depreciate quickly, and because of the appeal of new models coming out each year, some people will trade in their vehicles before their loan balance decreased enough to match the decreased car value. This results in the common phrase of being “under water” and often results in the negative equity of the previous vehicle being wrapped into the loan for the new vehicle. This is possible when lenders will allow a loan to value (LTV) ratio of more than 100 percent.
In order to stop this cycle of basically forever paying off the first car you ever financed, let the loan mature before purchasing a new one. Or, if possible, pay cash for the negative equity so your next loan doesn’t include the negative equity from the previous loan.
Putting It All Together
With all of the above types of debt, having a clean credit report and high score will help you get better lending terms and lower interest rates. This is because showing that you are a responsible borrower makes you a lower risk to the lender. You can learn more about your report by checking it regularly.
Working with a financial advisor can help provide even more insight on how to avoid and/or reduce debt and reach your future financial goals. By establishing healthy spending and saving habits, you could be debt free and get even closer, faster, to the comfortable lifestyle you’ve worked so hard to achieve over the years.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
