The recent global economic crisis and resulting restrictions have left far too many people deep in debt. Many of these people are ones who previously had solid gold credit and know how to pay off debts on time. Many of these same people are also painfully unaware and unprepared for the need to pay off past due debts or overdue accounts after tough economic times.
This situation is more challenging with the increase in unemployment rates, sometimes leaving people incapable of getting payday advance loans. There are also some States that have banned cash advance loans making it more challenging still. However, there are some steps that can be taken to help you reduce or even eliminate your debts and help you to begin building a brighter economic future.
What is the Cycle of Debt Associated with Payday Cash Advance Loans?
Some people I have heard tale, discuss this “endless cycle of debt” that is often associated with payday cash advance loans, but it is difficult to say where this myth comes from. In days of yore, there may have been some direct payday lenders that would charge loan fees and allow you to simply pay the fee whenever payments were due, ostensibly to renew the loan and to keep the payment in your pocket.
Oddly enough, this is effectively the same practice many pawnshops continue to this day for pawnshop loans. That being said, the pawnshops also serve a very important role in preventing people from going through a devastating financial catastrophe as opposed to just suffering a temporary economic setback from an emergency situation.
Where Do I Start to Pay Off Debts?
As tedious as the task may be, you will need to literally sit down with all your bills and determine which ones are more costly than others. Generally revolving credit lines will be among the highest based on interest payments alone. The exception here may be utilities if you are continuing to pay your utility bills on time.
You also need to determine your debt-to-income ratio. This means figuring out how much you earn as opposed to how much you owe. This does not necessarily include a full budget, including grocery costs and such, but it is a good idea to estimate and budget for those expenses as well, as they are in fact money that must be paid out if you want to get out of debt.
Do I Have to Write Down Everything?
There are going to be some areas where writing everything down is necessary to create an effective budget. There are other areas where writing everything down can literally save you thousands of dollars per year.
Writing down and recording your personal income is never a bad habit to get into and will make doing your taxes at the end of the year much easier as well. Writing down your estimated budget for all your bills will give you some idea of where your money is going, but not a comprehensive look.
You really should invest in a pocket notebook and write down literally everything you spend money on throughout the month. The purpose of this is to get a thorough understanding of where exactly all your money is going, and to help you find ways to save more money and to budget your money more effectively.
Which Debts Do I Pay Off First?
It should be obvious but is well to note that you need to continue paying your continuing bills such as gasoline or bus passes, groceries, utilities, and other expenses. However, if you are deep in debt, it could be from several different sources.
Some people are upside down in their homes, meaning they owe more money for the home than it is worth and may need to pay down the debt so that they can begin building equity in their home. Some people may owe on one too many vehicles that they purchased during better days. Some people, and among the most common forms of excessive debts are credit cards.
If you are buried in credit card debt and trying to pay off your debt in a timely fashion, you may have already noticed that some credit cards will have higher interest rates than others. Paying off the credit cards with the highest interest rates first is always the best bet.
However, cutting up your credit cards, even if you are deep in debt to the credit card companies is foolish and can hurt you financially.
Once the highest interest rate card is paid off in full, it can be used as a tool to help you keep, rebuild, or further establish your credit rating. Use this credit card with no remaining balance to pay off bills you would normally be paying off anyhow. Keep the money in the bank though, and do not use it. At the end of the month, pay off the credit card balance in full so there is no interest payment.
Continue paying down your credit card debt on the next card with the second highest interest rate, and on down the line until you have paid off all your credit card debt. While it can cause a very fine balancing act that is easy to fall off, it may be that you can use one credit card to pay off another, timing it so that one bill is paid off in full on time, and the other bill not being due for another month.
What Is Paying Off the Principal of The Loan And Why Is It Important?
Installment loans are different than credit loans or revolving credit loans. The installment loan is a loan where a principal amount is borrowed and paid back in addition to interest in fixed installments, generally weekly or monthly payments. In such cases there is a principal balance or the amount that was borrowed. Interest may be accrued or amortized over the course of the loan.
People who are financially aware and who have the financial means to do so, will often pay substantially lower amounts for houses, not because they got some sweetheart deal, but because they understand the process of economics and amortization and know how to work the system to their benefit.
Any time you are negotiating an installment loan, it is wise to ensure that the principal value of the loan can be paid back early without accruing additional penalties or having to pay any additional fees. A fifteen-year mortgage will create a higher monthly payment but result in a much lower overall cost. It gets better though.
If you do have a good job and can arrange a fifteen-year mortgage, there are immediate benefits. However, if you have paid attention, stifled your habitual responses and done away with all your impulse purchases, and have saved a few thousand dollars extra every year, that amount can then be applied in the form of additional payments “on the principal of the loan”.
Making two payments a month is a common recommendation by some banks but is equally foolish and costly. Paying the second payment on the principal value of the loan will reduce the overall amount you are accruing interest for, and thus, the actual amount of interest you will pay.
Doubling your mortgage payments will not save you any money but paying down the principal value of the loan will offer you a great financial savings and help you to build equity in your real estate investments at a much greater pace.
I Don’t Have Credit Cards – Should I Get One to Help Pay Off My Debt?
Having a credit card is never a bad thing if you do not go dragging it out every time you want to make the next impulse purchase. You need to have some self-control and you need to use it wisely. Having the credit card will not only allow you to use money in much the same way as a cash advance loan but will also help you to build your credit score at the same time.
If you have or can muster the self-control, even getting a secured credit card is a good option but look before you leap and be careful which credit card you apply for, especially if you need to find a secured credit card. Make sure that the credit card company will report your payments to the big three credit reporting agencies, and make sure you can pay the balance off in full every month.
See our ultimate guide to rebuilding your credit here for more information about learning how to use credit cards to pay off debt and build or repair your credit score.