Tuesday, June 22, 2010

Tips On Getting Out of Debt

Tips On Getting Out of Debt

Being in debt can be a real burden. All those monthly payments can tax the monthly budget. The interest on debt can significantly increase the amount of an item's original cost, and, by paying only the minimum payments, those debts will be around for a long time. Maybe the debt was used for investment purposes, such as funding a business, investing in real estate or buying stocks. Perhaps it was used to buy a home or to fund a college education. It could have even been used to buy "toys," such as a new boat, Christmas presents or jewelry. More people are in debt than ever before. However, there are ways to lessen this burden and get out of debt.

Function

    Debt is a tool to help a person leverage their money; he can buy more--with less upfront money. If someone wanted to purchase a car, for instance, it is sometimes hard to come up with the full purchase price at once. This is where debt comes in. A bank will loan that person money to buy the car, with an agreement that the person will pay back the money over time, with interest added onto the monthly amounts. By the time you've paid back the loan, this interest will have significantly increased the amount of the original loan--especially if you only paid the minimum payments. This is one reason why it is important to get out of debt as quickly as possible.

Types

    There are different types of debt including credit cards, mortgages, student loans and car loans, to name a few. Some types of debt, such as debt for investments are secured debts. This means that if you are unable to pay back the loan, the lender can receive its payment through your asset. For instance, if you used the loan to buy a house, the lender can take the house as payment. Unsecured debt, such as credit card debt, has nothing that will insure that the lender will receive its money back. In return, you pay high interest rates. When making a plan to get out of debt, get rid of the debt with the highest interest rate first.

Identification

    Identify all your debts. Make a list of creditors on a piece of paper in order from the highest interest rate to the lowest. Write down the amount of monthly payments and the loan balance next to the name of the creditor. The goal is to focus on paying down one debt at a time, starting with the one with the highest interest.

Prevention/Solution

    The method used to eliminate debt is sometimes called the "snowball," or "pyramid" method. Look at the first debt on your list. Put as much money as you can toward your monthly payment of this debt. If you can only make the minimum payment, that's okay too--it will just take longer to pay off. Continue to make minimum payments on the rest of your loans. After the first debt is paid off, put all the money that you were paying monthly on that bill and apply it toward the monthly payment on the next debt on your list, including the minimum payment that you had been paying. Continue this "snowball" method until all the bills are paid off.

Benefits

    The benefits of being debt free are many. You don't have the burden of trying to make the minimum payments every month. There isn't the stress of knowing that if you are unable to meet your obligations, you could lose something of great value--such as your home. You don't have the frustration of knowing that you ended up paying double or triple the amount for something because of the interest on your loan. Perhaps, most importantly, you have a sense of freedom.

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