Gone are the days of rock solid job security and being able to get business and personal loans for whatever you want whenever you want it. With unemployment still high and consumer confidence low to mixed at best, many individuals and families continue to have a hard time obtaining financial security. Those with high amounts of debt are paying so much interest on their loans that it seems impossible to make a dent in how much they actually owe. It’s hard to get motivated about paying down debt too when you owe thousands just in interest alone.
But it is possible to turn your finances around if you’re willing to put in the time and effort to get your debt in control and lower your interest rates. If you haven’t checked your credit report in more than 3-6 months you should take 10 minutes today and see where you stand. The government allows everyone to get three free credit reports every single year so you have no excuse not to take advantage of that. Inspecting your report also gives you the chance to catch errors and inconsistencies that could be hurting your score.
If you can improve your credit score you’ll also have an easier time getting a job, renting an apartment, and getting approved for a business or car loan. You’ll also want a strong credit score if you want to buy property down the road and secure a good rate on your mortgage.
If you have student loans, look into consolidating them now to see if you can lower your interest rates. It’s really not a difficult or overwhelming process at all and people do it all the time. Even just a few tenths of a percent can save you a considerable amount of money.
Lowering Your Monthly Payments
How much of your monthly paycheck goes toward paying down debt each month? It might be quite a scary number especially if you have student loans, car payments, credit card debt, and/or a mortgage. They can add up quick! If your loans have high interest rates your monthly payments are also going to be on the high side, and this can really lead to one giant financial mess over time.
Plus if your monthly payments are eating up your paycheck you’ll have very little money left for every day expenses. And that can get you stuck in the vicious cycle of using credit cards to pay for gas, groceries and other necessities, wracking up your debt even higher. Having a lot of debt is also going to hurt your credit rating. If your credit score goes down, the interest rates on your debt will go up, and then you’re more likely to get denied if you want to refinance or take out a new loan. This isn’t the type of cycle you want to get caught in.
If you’re new to these personal finance concepts don’t worry. Understanding the basics isn’t complicated. For example, the monthly payment on a high interest rate loan mostly goes towards the outstanding interest on your loan each month not the principle amount. So the principle balance takes longer to pay off. This is bad because who wants to have a loan longer and pay all that extra interest?!
We all want to think nothing unexpected will happen to us, but sooner or later something will break, get destroyed, or dry up. The higher your monthly loan payments are, the more likely you will end up in financial distress after an accident or interruption in income. And that is the scary kind of stress nobody wants to have to deal with because injuries and repairs are bad enough by themselves. If you can’t pay your bills your credit rating is going to drop making it harder to refinance or get a bridge loan, and then even higher monthly payments become inevitable.
Refinance And Consolidate Your Debt
Homeowners have the option of consolidating all of their debt into one big loan to save a lot of money each month if they are approved for a low rate. A consolidation loan reduces the overall interest rate on the loan, which can save hundreds of dollars each month in payments. This also means just one payment to make each month vs several, so that makes financial planning a lot easier. One way for homeowners to obtain a consolidation loan is by refinancing their home. Just don’t use it as a crutch to continue spending more money you don’t have.
Credit card debt have higher interest rates than homes, so the monthly payments can get you in trouble fast. Missing just one credit card payment can make the interest rate – and monthly payments – jump even higher. A better option is to refinance a home loan and use the money to pay off high-interest loans, including credit card debt and other unsecured loans. Not all homeowners are able to refinance and use that money to pay off all of their high interest credit card debt this way though, but it is a common way to lower monthly payments.
Why? Remember a refinanced home loan has a much lower interest rate than credit cards, so the monthly payment is a lot lower. Most home loans have interest rates below five percent, but credit cards have an average of 15+ percent interest. That’s a major difference. Home loans are for a longer term than credit card loans too, so monthly payments are lower over the life of the loan.
Once you can reduce your monthly payments, you should have extra money each month to pay for necessary expenses without going into further debt on your credit cards. You could also put that extra cash flow towards paying off your home loan early. Reducing your monthly bills helps you get your budget in control and thus your credit rating will start to improve.
Having a smaller balance on your cards will also improve your credit score. And that will give you the flexibility to keep a credit card or two for emergencies, saving yourself the hassle of having to apply for a loan if something unexpected happens.
Interest rates for home loans are very low right now, so it is a great time to take advantage of them. And the sooner you get your finances in order the quicker you’ll have the freedom to live the life you really want.
* Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
* Refinance Your Mortgage. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.
* Refinance Your Student Loan. SoFi is a fantastic social lending company that provides rates as low as 2.6% variable with auto pay and 3.4% fixed with auto pay. The reason why they can offer lower rates than the rest is because they analyze you based on merit, quality of employment, and education besides just a credit score and financials. There is zero origination and prepayment fees. Offer terms are from 5, 10, 15, 20 years in both fixed and variable. Both private and public student loans can be refinanced.
Besides low rates, one of their best features is their unemployment benefits. If you lose your job while repaying your loans, you don’t have to pay your loan for up to 12 months while you look for a new job! Interest will still accrue, but having this cash flow break is a huge benefit. They also provide job assistance guidance as well. Over 500,000 users have refinanced with SoFi for an average $15,767 in lifetime savings.
Learn more and refinance or apply for a new student loan here.
Updated for 2018 and beyond.
Tie the Money Knot says
Rates are low right now, and we don’t know what will happen in the future. An option for some might be getting a shorter mortgage and keeping payments not too much more than a prior longer-term mortgage
Rates really are super low now it’s crazy!
Edward Antrobus says
My highest rate is 9.99%, but I have one payment left on that due in two weeks. After that, my smaller student loan is 5.75% and the larger is 3.62%. I was planning on having it all knocked out within the next 7 years, but the estimate for the dental work I need is probably going to set that back nearly a full year.
That’s fantastic you’re almost done with that highest rate. Sorry to hear you’ve got some expensive dental work coming up. It’s frustrating how expensive it costs and how painful something as small as a tooth can be. I had to get a filling replaced last month because I was in so much pain I couldn’t chew on one side anymore.
Jenny @ Frugal Guru Guide says
When you refinance, you have to make sure you’ll be paying less over the life of the new loan, not just less per month. Someone 10 years from paying off their house who refinances for 30 years usually will end up paying MORE if they don’t make more than minimum monthly payments.
Good points Jenny. It definitely is important to look at the whole picture and making sure that refinancing makes sense. Even though refinancing sounds good the numbers don’t always work out in the borrowers favor.
Tushar @ Everything Finance says
I think there’s always a way to do something more to ensure that you are financially secure. It’s hard to imagine sometimes but there always has to be SOMETHING. It definitely can be overwhelming to have debt but there’s a light at the end of the long, dark tunnel
Nice positive outlook Tushar! I agree with you that there’s always something that can be done to improve one’s financial situation.
Very clear insight to lowering monthly payments. Great points, as always.
TB at BlueCollarWorkman says
And then of course sometimes none of these things can be done. Or they already have been done, and all you’re left with is just working at your job and making your monthly payments on time. It takes awhile to slug away at debt, and even with all the advice in the world and great ideas, you still just have to slowly pick away at it. Month by month. But it can be done. People do it every day!
Yep, persistence is key and every dollar counts! People who get into financial trouble tend to think “oh this $20 xyz won’t matter,” or “I’ll just buy this $100 item now and make up for it next month” and never stop.
I refinanced my mortgage at 2.29% and other than this have a 0% balance for another year. It makes a lot of sense to refinance or consolidate but all efforts can be annihilated if you use the extra breathing room to take on more debt.
Nice job refinancing to 2.29%. That must have felt good!
Brick By Brick Investing | Marvin says
Refinancing and consolidating debt is one of the best things someone in debt can do. By putting all that debt in one place and negotiating a lower rate they can begin chopping away at it diligently.