The bottom line is that you cannot pay back a loan if you are overspending. Get your overspending under control and you are halfway there to defeating your personal debt once and for all. You cannot pay back money you have borrowed if there is not enough money left over to pay back in the first place. So, in order to sort this out, the simple solution is to not overspend. That is easier said than done. However it can be done, with a little self-determination you can pay back the money you owe and still have money left over for a rainy day.
So let us begin with credit cards. For example, if you had around $2,000 dollars to pay off in debt, and the interest rate was 18%, then that would mean you would have to pay back around $360.00. However, if you had around $2,000 in a savings account which was 2% after tax. then the interest you would earn on that would be £40.00.
The fact of the matter is this. If you have to have a credit card, go for one with the lowest APR [Annual Percentage Rate] that you can get. Always remember however, that the APR will only kick in if you are late paying your credit card bill even by one day. If this does happen then your financial status could be affected – which means your ability to ‘borrow’ could be affected in the future.
The idea of looking for a credit card with a low APR – or a low ‘fixed’ APR means that you will not have much interest to pay back. Credit cards with a high APR obviously means that there is much more interest to pay back. So, always look for the lower option when searching for a credit card.
By sorting out your debts now you will immediately be better off in the long run. Nearly all of us have bank accounts of some kind or other. What does it mean when we place our money into a bank? Well, what you are doing is ‘lending’ the bank your money. This money is then passed on, by the bank, to those who wish to borrow money.
So when you place your money into your bank there is a marked difference with the rates. This means that the savings rate [the rate in which the bank borrows money from you] is different to the borrowing rate [the rate it charges other people when they want to borrow money.]
So it follows that borrowing money from the bank will always cost you more in the long run than you will get back by saving. So we then have a situation in which you place your money in your bank – the same bank that you apply for a loan from. Therefore, the bank is not only borrowing your money you lent them, but charging you at the same time when they give you back your money in the form of a loan. In other words, banks will always charge you for the money you lent them, but they will do it at a higher rate because you are ‘loaning’ back your own money. This is a ridiculous state of affairs that can be avoided with a little knowledge.
By getting rid of your debt, at the earliest opportunity, your pocket will gain. Paying back the cost of a debt is always much higher than any benefit gained by saving. So what if you happen to be ‘locked in’ to your account where a penalty is charged if you pay it off? Simply leave your money within a savings account, which would gain interest for you. Then wait until the penalty is small enough until it really does not matter.
If the interest rate on your debt is less the amount your savings earn after your tax has been paid, then if you are financially disciplined you can profit from building up your savings and keep the debts. In other words you are being paid on money that is lent to you by the bank, for nothing.
It is all about prioritizing. Pay off your biggest debts first. The ones that are causing you the biggest headaches. Look at the things you may be able to do. Would it be possible to lower your debts APR [Interest Rates?] Would it be possible to go to a debt management company that could put all your debts together in one lump sum enabling you to pay off the debt at a rate you can manage?
These too, are the things you have to look at in order to gain back control of your debt. With a debt management company, the company will speak on your behalf to all your debtors. If they agree then a financial plan will be drawn up in which you have to sign a new contract.
By signing the contract you are telling your debt management company that you will pay off your outstanding debts at the rate specified. Miss a payment however, and the full debt becomes payable. So in order to pay your debts, get the biggest ones out of the way first. Be disciplined with yourself. Understand that although you may be short of money right now, you are looking at the ‘bigger picture’ where you will eventually be free from debt.