Debt financing purchases durable goods and provides for day-to-day expenses. Loans, however, do carry additional costs related to interest. A proper debt retirement strategy is necessary to save money and improve your bottom line.
Identification
Debt retirement refers to the process of paying off loans in full. Corporations retire bonds and commercial paper, while individuals may retire credit cards and mortgages. Debt is retired either with positive cash flow or by refinancing into new loans.
Features
Debt retirement strategy is predicated upon interest rates. You should prioritize paying off high-interest rate debt first to save interest costs. Additionally, adjustable-rate loans may begin with low rates prior to adjusting upward. If possible, these loans should be retired before unfavorable rate increases take effect.
Considerations
Debt may be leveraged for growth. Efficient leverage requires that loans be invested at higher rates of return than their associated interest rates. Leverage works best with low-interest rate debt that is paid off over the long term. For example, mortgages are leveraged to buy property.
Benefits
Debt retirement saves interest expense on both current and future loans. Creditors reward borrowers with low interest rates in exchange for paying off debt aggressively.
Risks
Failure to effectively retire debt increases the risks of financial distress and default.
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