2020 hasn’t been the year most of us had in mind – especially when it comes to finances. The economy has struggled while many have lost jobs.
There is one big silver lining for those with student debt: interest rates have been waived through the end of the year. That’s right, in an effortto provide relief to student loan borrowers during COVID-19, interest is being set at 0% through December 31, 2020.
This interest slash means that your student loan payments go directly to paying off your principal, which is enormous if you have high-interest rates or a large amount remaining. You can make a dent in your remaining debt now through the rest of the year. Here are five ways to make serious progress.
Photo by Karolina Grabowska from Pexels
1. Make a Plan or Follow a System
You’ve got to have a plan. It’s not rocket science – but it can be challenging to sit down and devise a strategy for paying off your student debt. You need a debt to success system.
Pull out the pen, paper, and budget and chart your path to success. Make a plan and get some accountability to stick with it. Without one, you’re likely to slide, become passive, and delay. If this has been you, let the slashed interest rate be your motivation to get started.
2. Budget Like Your Life Depends on It
Your budget is the linchpin of your success. Budget well, and you’ll be paying the maximum possible each month. Budget poorly, and you may not be paying off a cent.
There are plenty of tools out there to help. Mint, YNAB, and EveryDollar are just a few that could help you budget well.
3. Make Sacrifices
Once you’ve got your budget locked in, it’s time to make some cuts. It’s not fun to think about what expenses you can eliminate – but it’s well worth it. Take a look at your lifestyle and make a list of everything not vital to your life.
Consider cutting out TV/streaming subscriptions, eating out, unnecessary clothes, alcohol, etc.… Make some sacrifices.
4. Find an Extra Source of Income
Making sacrifices can help you cut expenses. But perhaps the most practical way you can make progress on your student debt is to make more money. Now may not be the best time to pick up a part-time job at a restaurant or coffee shop, but thankfully you have other options.
You could deliver food or groceries while many continue to keep their distance. You could become an Uber or Lyft driver as people begin getting out more. You could even look for online freelance or gig work on sites like Fiverr or Upwork.
5. Consider Refinancing
Student loan rates have dropped big time for new borrowers in 2020, but unfortunately, this doesn’t apply to existing borrowers. However, existing borrowers could refinance their student loans into a private loan to take advantage of the current market’s low-interest rates.
This route can be complicated, as refinancing into a private loan means deferring any federal benefits. So it may be a better option in December than it is right now. Talk to an expert to see if this tactic might make sense for you.
Take advantage of this interest rate situation if you can. Your future self will thank you.
No matter how careful you are with your finances,
unexpected expenses can sometimes hit you completely out of the blue. A medical
bill that appeared from nowhere, home renovations, a sudden urge to take a
vacation to avoid suffering a burnout… and the list goes on. Understandably, no
one should just jump into applying for a loan without a solid ground on how
things work in the financial realm, so in that spirit, here are 8 things to
know before you proceed:
1. Have a plan on how to repay it
Not having a steady stream of income and trying to apply
for a loan is a bad idea. Not only will you not be able to repay it on time,
but it’s also highly unlikely you’re going to get approved in the first place.
Even if you do have one, you’re going to need to gather all the necessary means
of proving it before you apply. Usually, a letter from your employer will
suffice. For those of you who are self-employed, it gets a bit trickier, but
it’s still doable – just dig up the tax returns for the past two years and that
should be it. If you have money coming in from other sources (such as part-time
work), you’re going to have an easier time paying back the loan.
2. Minimize the lender’s risk
Your finances can be examined from a purely mathematical
standpoint. The lender will take a look at your assets and subtract your
liabilities; that’s how your net worth is determined. The former is a sum of
what you own – such as your property, and the latter is a sum of your
obligations – such as your mortgage. Understandably, the lender is running a business, and
as such, looking for ways to minimize the risk is of paramount importance. So
do what you can to present yourself as a financially stable individual and
gather all the evidence necessary to back your case.
3. Know there are different
types of loans
Depending on your needs, there are different types of
loans you can choose from, with personal loans being the most popular ones by
far. While some lenders have tighter requirements than others, there arepersonal loans guaranteed approval. Otherwise known as secure loans that are backed
by collateral, these are particularly suitable for people with no credit
history whatsoever. Then again, if your interests are of commercial nature,
consider getting a business loan; once again, there are plenty to choose from.
Lines of credit, term loans, equipment financing loans, and so on. There are
also specialized loans you can apply for such as auto loans or student loans. When
it comes to loans in general, there is no one-size-fits-all solution – it
always depends on your needs.
4. Interest rates are one of the
most important considerations
Interest rates have a great deal of influence on how much
you’re going to end up paying in total. It’s hard to give any general advice on
the subject because these can greatly vary from lender to lender. In fact, they
can be anywhere between 5% and 35%, which can make quite a substantial
difference, especially over the long term. Note that interest rates may not be
the only fee you’re going to end up paying. Some lenders will charge you
processing fees and some of them even impose a penalty for paying off the loan
early, costing them valuable interest rate earnings in the process. Bottom line:
every lender is different so always make sure to do your due diligence.
5. It’s a good idea to exhaust
your other options first
There are alternatives to getting a loan, all of which
should be considered before applying. If you have friends or relatives who
could be lending you some money, it’s always better to ask them for help first.
After all, no one will offer you as favorable terms as them; in fact, they may
not even ask you to pay them back (but make sure to have a clear dialogue about
the topic at the very beginning, otherwise you may jeopardize your good
personal relationship with them). But if they insist on repayment – which they
have every right to – it’s good practice to formalize the agreement in one way
or another. Even so, there’s no need to be a burden to your friends and family,
as there are other options; credit unions are one of them, and if the situation
is suitable, you may even turn to your local church or get in touch with a
charity.
6. Every loan comes with its own
set of requirements
Depending on the type of loan you’re after, there will
always be some requirements you need to comply with. But the following
requirements universally apply to all of them:
– You need to be at least 18 years of age.
– You need to be a resident of the country.
– Your financial circumstances need to be proven.
– You need to have a steady stream of income.
Bear in mind this is the bare minimum – depending on the
lender, other requirements and restrictions may apply.
7. Know the common loan terms
You’re probably familiar with the interest rates already;
basically, this is a portion of the repayment the lender collects each month.
The loan term is the total number of months you’ll be paying it off. The annual
percentage rate is what the lender will charge you in addition to the interest
rates. Finally, the principal is just a fancy way of describing the total
amount of money borrowed. This is the basis on which the lender charges you
interest rates. As you keep pacing back the loan, the principal decreases, and
so do the interest rates.
8. Make a couple of price
comparisons
Don’t just dive right in and pick the first lender you
see. If you take a little bit of extra time to do some in-depth research which
includes comparing prices online, chances are you’ll be able to find a much
better deal in general. While you’re at it, it’s good to check up on their
online reputation by visiting customer review portals and social media. As much
as the lenders can afford to be picky in regards to who they take on board, you
– as the loan taker – must be at least equally as careful and only work with
the ones you can trust.
Conclusion
Based on these valuable pieces of advice, applying for
your next loan should be a breeze, as long as you’re aware of your options. So
make sure to do all the research necessary and only apply for a loan when
you’re completely comfortable with it.
Kids learn a lot at school. They learn about history, the Founding Fathers, how to do algebra and why rivers erode their banks. And while that’s all well and good – there’s just one problem. It’s not a practical education. Educators are often so obsessed with teaching their own hobbies and pet interests that they neglect to impart the life skills that will really help children navigate the financial world and succeed in it.
Top on the list of financial topics that should be considered in school is buying a home. Taking out a mortgage is likely the biggest financial decision a young person will make in their lives. Yet the school system right now neglects to teach this in any kind of detail. Instead, children are hyper-trained at an early age in the academics, at the cost of their social, emotional, practical, economical and financial development.
The first thing that kids need to understand about mortgages is the interest rate. This, in essence, is the price you pay for money. The higher the interest rate, the higher the price of money. A mortgage is nothing more than a fancy way of saying a “house loan” – and the interest paid on it is the price of having that money today.
Another idea that kids need to get their heads around is the idea of a term. Mortgages come packaged up with different terms. The longer the term, the more time a person has to pay off their mortgage. Most mortgages come with a 25-year term, but term lengths can vary, depending on an individual’s preferences.
Kids need to understand that, given a fixed interest rate, a longer term will result in a higher total amount of money paid as interest. For example, at an interest rate of 5 percent and a mortgage of $100,000, the total amount of money paid as interest over 10 years is $26,682. If paid over 25 years, however, total interest payments are more than $73,441 – nearly the total value of the loan.
When people fall behind on their mortgage payments, they may face foreclosure. Kids need to understand the consequences of not paying their creditors. Foreclosure means that the person paying the mortgage loses ownership of the house, which is then sold by the creditor to recoup their losses. They also need to understand that it is possible to get foreclosure help to prevent this from happening. Sometimes it is possible to restructure the debt or modify the household budget to make it easier to pay mortgage instalments in the future.
Mortgage Insurance
Mortgage insurance is mandatory when the value of the loan on the home is more than 80 percent of the price of the home. This protection is needed, say, regulators, to protect borrowers and creditors alike. However, in practice, it really means more money in the lender’s pocket. Kids need to understand, therefore, that borrowing money can be very expensive. It’s not just the interest rate that they need to be concerned about – it’s all the other fees that they might have to pay.
The economy has undergone a seismic change in recent years and historically low interest rates have radically altered the way people behave in the financial markets. A generation ago it was unusual for individuals to carry any personal debt other than a loan for a vehicle. Traditionally it was the case that savings accounts were built up for purchases of household items and most people only bought items when they had saved up enough money to complete a purchase. There has been an explosion in unsecured lending in recent years in the form of credit card and store card debt and much of this has been driven by retailers who have used credit as a means to fund a continued growth in sales. Shareholders and the markets have expectations of continued growth and it appears that this has been funded by a growth in credit. It is not uncommon for those with relatively high levels of debt to also hold savings accounts but the return on savings is usually linked to a base rate of interest which is currently at rock bottom. The low levels of returns on savings are discouraging new saving and is also creating an opportunity for savers to use their funds to reduce debts.
Clear Down Most Expensive Debt
Basic maths shows that it is better to clear down debts that are incurring charges of up to thirty per cent for a typical storecard than to leave savings in an account that is only earning around one per cent. The decision may not be so clear cut for some people but generally it is recommended that savings are used as a means to cut debt and it is better to start with debt incurring the highest rate of interest. It is important to look at the whole picture as there may be good reasons for not utilising all savings to clear down debt.
Remain Flexible For Genuine Emergencies
People still like to save for emergencies and it may be the case that if debt levels are reduced a credit card firm may decide to reduce a credit limit in order to reduce its own exposure to bad debt. This would mean that an individual may clear down some expensive debt but be left with little or no flexibility if faced with an emergency such as a defect in their central heating system which required urgent attention. With no savings or available credit to rely on there may be few options to resolve an immediate problem so it may be wise to retain some level of saving for such emergencies.
Consider The Term Of Outstanding Finance
It may be sometimes more important to clear debt which has a specific lifespan and would be difficult to replace once that time had elapsed. A saver may be faced with an option to clear an expensive storecard or a relatively low interest mortgage account. Whilst it may appear to be beneficial to reduce the expensive debt it may be the case that the mortgage debt has a fixed term which must be adhered to. If the term is allowed to expire and a solution to clear has not been found it may no longer be possible to simply ask the lender to extend the term as criteria for lending may have changed. In this case it would be more prudent to clear down a low interest account purely because of the fixed term involved. If debts appear to be complex and unmanageable then it may be appropriate to seek debt help so that an effective strategy can be developed. It is important to monitor the financial markets and review savings rates periodically because banks exploit consumer intertia by reducing interest returns on existing products whilst hooking new customers with attractive rates on new products. It may be the case that by switching savings accounts or products it is possible to achieve a higher rate of return that reduces the case for using savings to clear down debt, especially if most of the debt is held in a low interest mortgage.
Are There Short Term Alternatives Available?
Psychologically it may be important to maintain some level of saving as this buffer may offer comfort that would be eroded were a balance used in its entirety to clear debt. Maintaining some level of debt is not a bad thing either as credit scores are enhanced if debts are incurred and payments are met on time. This can be useful when applying for a mortgage as a potential lender will be able to form a view of a borrower that demonstrates a commitment to responsible actions when dealing with debt. There may be little value in removing savings early from a fixed investment plan to clear debt as early withdrawal penalties could offset any interest savings made by debt clearance. A better long term plan may be to seek a cheaper alternative form of credit such as a zero per cent balance transfer period to reduce interest exposure temporarily allowing time for fixed terms to expire so that the savings can be used to clear down debt in a timely manner that does not incur early withdrawal penalties.
Action Is Essential
It is clear that by not taking action there are likely to be inefficiencies in financial arrangements exposing individuals to low rates of return on savings and high levels of interest on debts. Whilst it may appear obvious that high interest rate debts should be cleared with low return savings it is important to review the overall financial situation and factor in long term objectives before making wholesale changes. The term of debt is an important factor as are assessments of medium term cashflow requirements and a balanced approach will lead to an optimum solution.
