Because I didn't work for most of the summer, I may not achieve my goal of paying off one of my private loans by the end of the year. It has a co-signer and no way to reduce interest like my other loans. It's also the mid-range of interest rates. My Federal loan is fixed, which has its upside as well as down; I graduated, consolidated and obtained a fixed rate, however, in the meantime, rates went waaaay down, and are now on an upswing. I know someone with higher rates of interest on a student loan for undergrad who is going to look into automatic payments and find out if that will reduce interest. I don't think it would be possible several years later to consolidate and get a better rate; if it had been possible before the whole banking industry implosion, it's not likely to be possible now.
My targeted loan will likely increase in another month or two, as the associated webpage lists interests rate that I believe are good through September; the trend is upward, so I can expect this loan to increase. My bar loan has been all over the map and my recent payment was required to be about $3 less than the upcoming payment. While it isn't a significant increase, and the difference between that and my private loan, isn't likely to be that much, the private loan is a significantly higher amount of money, so it makes the most sense to put more money on that.
I waffle between targeting the private loan entirely and paying extra on the bar loan so I can get a slight reduction in interest. Which is probably silly; the extra is around $40 and it would be better to direct another $50 to the private loan.
They say you should target the smallest bill or the highest interest rate in order to reduce debt. While I'm deviating from that plan in order to free my co-signer from the obligation, I will still see progress by targeting extra payments to one portion of the loan. Once that portion is gone, my payments to each other segment will automatically increase
Showing posts with label debt reduction. Show all posts
Showing posts with label debt reduction. Show all posts
Wednesday, August 20, 2008
Tuesday, August 19, 2008
Debt Reduction
When attempting to pay down debt, it's important to make payments that are higher than the minimum. Generally, a debt will not be reduced unless you pay at least the minimum payment + interest assessed for that period. That formula ensures that a) the debt will be reduced by the amount of the minimum payment and b) the overall interest will be reduced. They say people pay on credit card balances for 20 years, ultimately paying a lot more for whatever they did to rack up the bill.
A good rule of thumb is to take the above amount and round it up to an even dollar amount. Continue paying that amount every month, and every month you will be paying a slightly higher amount on principal than the month before. It helps to look at your bill every month and compare it to the bill for the previous month. If you're ambitious you can make a spreadsheet; over time you'll see the increase in principal paid each month. It's important to target only one debt for this type of activity, and yes, I know it's difficult. I did this in turn with each portion of my consumer debt, starting with the debt that was largest and had the highest interest rate, my credit card.
Once the first debt is taken care of, add that monthly payment to the next targeted debt so you will progress even faster. In my case, I had overwhelming amounts of debt; due to my naivete in believing that law school would help my bottom line I ended up consolidating credit cards, buying a car and ended up with a bank loan and shiny new credit card debt right before the economy imploded. In addition to my student loans. I had a dentist bill looming over my head. I was paying a certain amount on my credit card each month and once I paid off the dentist, I paid off my car, one month early. It isn't much but that was another chunk of money to send to the credit card and I did. And kept sending them that amount of money in addition to my previously normal payment.
Six months later, my bank loan was paid off and I was able to put that amount of money toward my credit card in addition. It still took another year to pay off. I'd be embarrassed to say the dollar amount but let's just say that I saw the money profile on CNN last year when it featured a social worker who wanted to go to law school. He had approx. $100k on credit cards. I felt downright fiscally responsible.
Incidentally, CNN gave him the same advice I've just given; pay the smallest one first (dentist bill, followed by car loan) and add those amounts to the next targeted debt. I didn't add my bank loan to my calculation for faster payoff as a) it was deducted automatically; b) ended in 6 mos; and c) had a lower rate of interest than the credit card. It made more sense to me to work on the credit card; each month would add more interest to that balance, which wasn't true of my bank loan.
A good rule of thumb is to take the above amount and round it up to an even dollar amount. Continue paying that amount every month, and every month you will be paying a slightly higher amount on principal than the month before. It helps to look at your bill every month and compare it to the bill for the previous month. If you're ambitious you can make a spreadsheet; over time you'll see the increase in principal paid each month. It's important to target only one debt for this type of activity, and yes, I know it's difficult. I did this in turn with each portion of my consumer debt, starting with the debt that was largest and had the highest interest rate, my credit card.
Once the first debt is taken care of, add that monthly payment to the next targeted debt so you will progress even faster. In my case, I had overwhelming amounts of debt; due to my naivete in believing that law school would help my bottom line I ended up consolidating credit cards, buying a car and ended up with a bank loan and shiny new credit card debt right before the economy imploded. In addition to my student loans. I had a dentist bill looming over my head. I was paying a certain amount on my credit card each month and once I paid off the dentist, I paid off my car, one month early. It isn't much but that was another chunk of money to send to the credit card and I did. And kept sending them that amount of money in addition to my previously normal payment.
Six months later, my bank loan was paid off and I was able to put that amount of money toward my credit card in addition. It still took another year to pay off. I'd be embarrassed to say the dollar amount but let's just say that I saw the money profile on CNN last year when it featured a social worker who wanted to go to law school. He had approx. $100k on credit cards. I felt downright fiscally responsible.
Incidentally, CNN gave him the same advice I've just given; pay the smallest one first (dentist bill, followed by car loan) and add those amounts to the next targeted debt. I didn't add my bank loan to my calculation for faster payoff as a) it was deducted automatically; b) ended in 6 mos; and c) had a lower rate of interest than the credit card. It made more sense to me to work on the credit card; each month would add more interest to that balance, which wasn't true of my bank loan.
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