Entries Tagged 'debt' ↓
November 5th, 2007 — debt
Adding debt to your existing mortgage can be a convenient way to consolidate your debts into one place and save on interest payments.
If you have credit card debts, incurring an interest rate of 15% or more, this strategy may be particularly effective.
Can I add debt to my Mortgage?
Many people who have witnessed a growth in house prices will be able to easily remortgage. Remortgaging enables the homeowner to get a bigger mortgage against the increased value of your house. The extra money can then be used to pay off the other debts. This means you will be paying the old debts back at an interest rate equivalent to your mortgage interest rate.
For those who recently bought houses in America, it may be very difficult to remortgage for a bigger value of mortgage. With house prices falling, the % of the house value that is mortgaged will increase. There is the potential for getting a 100% mortgage, but these are usually be more expensive. Also, mortgage lenders will probably be cautious about increased lending with falling house prices. In these circumstances, the only thing is to hope house prices resume their upward trend. Unfortunately, this may be quite a while.
Arguments against adding debt to Your Mortgage.
1. Encourages people to create more debt.
If you do consolidate your debts under your mortgage, you have to be aware that you have not solved your financial problems; you have merely provided a slightly better solution for the management of your debt. If you don’t address the fundamental shortcomings of your financial situation, your debt will continue to rise, and there is a definite limit to how much you can keep remortgaging and adding to your debt.
2. Takes longer to Pay Back.
A mortgage repayment period is typically 25 - 30 years. By placing the debt into our mortgage we increase the mortgage size and it means it will take much longer to pay back. This means that the total interest payments could be higher over the course of the mortgage. In some cases it may be better to keep paying back a personal loan at 7% interest. The rate is not much higher than a mortgage and it will make you pay off your debt quicker.
October 24th, 2007 — book-reviews, debt
The UK is experiencing a record number of consumers struggling with huge personal debts. This book shows how you can get out of debt.
It does not offer any quick fixes, but encourages the reader to target the root cause of debt, which is usually overspending. Drawing on personal examples, from the author’s own experience and also from debtors anonymous, the book shows how overspending is often related to psychological factors.
It suggests that to get out of debt, the most important factor is the ability to be honest with yourself and a determination to take responsibility for your financial situation. Because the book is written from personal experience it offers an encouraging tone, rather than a condescending one.
Well worth reading
How to get out of debt at Amazon.co.uk
How to get out of debt at Amazon.com
October 24th, 2007 — debt
Debt consolidation is the process of moving debts into one single debt, usually at a lower interest. These are some tips for getting best deal from debt consolidation.
1. Use Value of House
The lowest interest bearing loan is probably your mortgage. Make sure that you use the equity in your house to consolidate debt. For example, it is better to have your debt moved from a credit card to your mortgage. Because the interest rate will fall from 17% to 5%
2. Change Habits.
Debt consolidation is not a quick fix to your monetary problems. It doesn’t address the underlying problems which caused the debt in the first place. When you decide to consolidate your debts, take this as an opportunity to take a fresh look at how you manage your finances. Try to reduce your overspending. Plan ahead and if necessary look to increase your income. If you just consolidate your debts but continue to create more debt, it will merely delay the problem
3. Never Miss Payments without discussing.
Before you finalise a debt consolidation programme, make sure you continue to meet the minimum repayments. Otherwise it will adversely affect your credit rating. You are still responsible to meet all payments until after the debt has been switched.
4. Search for Cheapest type of loan
If you can’t consolidate your loans into your mortgage there are still likely to be better options than paying credit card debt. Some of the cheapest interest rates may be overdrafts from your bank or a personal loan
5. Drawbacks of consolidating into mortgage.
If you do consolidate all your debts into your mortgage there are several drawbacks.
- It will take longer to pay back the debt, therefore, it may cost more in the longterm.
- If you default on paying back the debt, you put your house at risk of repossession.
- House prices are no longer rising. In the US house prices have been falling. In the UK house prices may fall in 2008.
- Therefore, it is dangerous to consolidate debt in the hope that house price rises will reduce the % of debt.
See also:
October 22nd, 2007 — debt
1. Don’t Panic
If you find yourself in debt, don’t let it dominate your life and thoughts. The best way to deal with debt, is to make a plan of action to resolve the situation. It is only when you know the full extent of your problem that you can work out what you need to do. It will not help to ignore the problem because you will always have a feeling of anxiety at the back of your mind. If you feel out of your depth, take the advice of professionals.
2. Change your priorities - Pay off debt first
Decide how much you should try and pay each month and then make this a priority for your spending. Make this debt reduction, the first payment out of your paycheck. Then use the rest to pay for other things; if you do it the other way around, you may find you spend too much and don’t have enough to make more than the minimum payment.
3. Pay off highest interest debt first.
The real difficulty in dealing with debt occurs when we have large interest payments. This means we can be paying significant amounts just to service the debt, without reducing the actual debt. Therefore, try to reduce the highest interest paying debt. This may be credit cards at 18% interest.
4. Cut off inessential spending.
Take time to go through all your monthly expenditure and for each item see whether it is essential or can be reduced. For example, do you need both a landline and mobile? Do you need 300 cable TV channels? For each bill look at whether it is worth switching to another company. More ideas on reducing overspending
5. Cash Only.
If you have a tendency to overspending, try carrying only cash around. When you have to withdraw cash and part with it, it becomes more difficult to spend. When we can buy things on plastic we tend to be much more willing to spend money.
6. Extra income
Nobody likes to take a second job. But, if you did overtime for just a couple of months you could put all the earnings into paying off your debt. This creates the snowball effect of reducing debt and debt interest payments. Therefore, after a couple of months you can go back to a single job, but, you will be in a better position to pay back the debt.
7. Debt Settlement
This is an last ditch resort, but, for some people it is probably better than declaring bankruptcy. It involves a debt settlement company, on your behalf, negotiating a reduction in your debt. It leaves you with a single monthly repayment and a lower total amount of debt. This option has to be taken with due care and consideration. In particular, it is important to not see it as the solution, but part of the solution. If you make a debt settlement,but, don’t address the underlying causes of debt it will merely delay the problems.
October 5th, 2007 — debt
Consolidating debt means bringing together different loans and debts into 1 place. Debt consolidation may involve a deal to reduce the total amount of debt or it may just involve moving debt to the lowest interest rate. Debt consolidation is highly desirable. Many people waste significant amounts of money because they keep debt at a higher interest rate than necessary.
1. Find Lowest Interest rate.
The main advantage of debt consolidation is to find the lowest interest paying debt plan. This is unlikely to be a credit card which may charge 18-20%. It is likely to be either your mortgage or a personal loan.
2. Use Value of Your House.
If you own a house, it will be easier to consolidate debt, because the debt can be secured against the value of your house. This can be either as your mortgage or a secured personal loan. Adding to your mortgage will offer the lowest interest. A mortgage also spreads the repayments over the longest possible period. However, it will mean your home is at increased risk of repossession.
3. Debt Settlement.
Debt settlement involves consolidating debt, but, also reducing the value of your total debt. A debt settlement company agrees to clear your debts but negotiates a reduction in the value. Your debts are cleared as “settled in full” rather than “paid in full” More detail: Debt settlement
4. Target Cause of Debt.
There is only so much debt consolidation can do. It is good to move debt to the lowest interest rates. But, it is better to reduce the total amount of debt. Look upon debt consolidation as chance to make a new start. Use the reduced interest payments for paying off more than the minimum. Look at: How to reduce debt, how to reduce overspending.
5. Don’t Close All Credit Cards
If you move debt away from a credit card, it is best to keep the account open. After 2 years of inactivity, my Virgin Credit card offered a nine month 0% balance transfer option. This is very useful.
September 10th, 2007 — debt
There are so many articles advising us how to get out of debt, that we may automatically assume debt is a bad thing. However, there are many occasions when debt can actually be a good thing.
These are the situations in which debt can be helpful.
1. Mortgage debt
There are few people who could buy a house without borrowing from the bank. Many people who criticise debt, forget that they have debts of up to £150,000 secured against the value of your home. A mortgage is a big debt, but it is a better financial proposition than renting. Getting a mortgage is like having an investment for the future. It offers the prospective of living debt free in 25-30 years. Furthermore, because it is secured against the value of your house, the interest rate is likely to be relatively low and not much higher.
2. Going to College.
It is unfortunate that, in recent times, debt is almost an essential aspect of going to University / college. However, again the cost of going to University is a good long term investment. A good degree creates the potential for higher earning power. This extra income is greater than the debt incurred. The only thing I would caution is don’t go to university just for the sake of it. If you spend 3 years accumulating debt, but don’t value the degree you are doing, you have to ask yourself whether it really is an investment.
3. Student Loans.
In the UK, student loans are set according to the inflation rate. This means you can borrow the full amount and invest in a higher interest paying account. Even if you don’t need to spend the student loan you can make a return on this debt. Furthermore, repayment on this loan / debt is dependent on income and you will not pay it back until you earnings are sufficiently high.
4. Life Cycle Hypothesis
The life cycle hyposthesis states that we should smooth consumption over the course of our life. There is no point in living in poverty for the first 30 years of our life, and then having loads of money to spend when we are old and unable to enjoy it. Most people find that there income increases over the course of their life and that their expenses fall. Therefore, there is good sense in borrowing during our early working years. If we feel the necessity of having no debts in our 20s, we will either spend all our time working, or we will have nothing to spend. Don’t just think about the future, consider the present as well.
Debt is good so long as we are using it for a specific purpose. If we are investing in our education or purchasing a house, we should not feel guilty and strive at all costs to avoid paying off the debt. What we should be careful of is creating unnecessary debt and holding debt in a form which attracts a high interest rate.
See also:
August 17th, 2007 — debt
Debt settlement is a drastic measure for reducing your debt. It involves negotiating with your credit companies to have your debt “settled in full” in return for a one off payment, usually much less that the outstanding balance. Usually debt settlement will be done through a third party, in this case, one of a growing number of debt settlement companies.
Advantages of Debt settlement
1. Single Debt
Debts are consolidated into a single source, giving you just one monthly payment to make. This can reduce the stress of making several payments. However, at the end of the day, what is important is the total amount, rather than the number of companies.
2. A way to reduce the debt burden.
Debt settlement can lead to a significant reduction in your outstanding debt. In some cases a debt settlement company may be able to reduce debt by upto 50%. Outstanding debt places a significant role in determining your credit rating. If you balance falls by $10,000, in this regard, your credit rating will have an improvement.
3. Offers a new Chance to become debt free.
To be most effective, debt settlement, should be viewed as an opportunity to turn over a new leaf and make a concerted effort to pay off your debt. For a start, there is the initial benefit of seeing a substantial reduction in outstanding debt. But, this debt reduction should be looked upon as the first step in improving your situation. If you make a determined effort to meet the new monthly repayment and not add to your debt, you can have the chance to become debt free in a few years.
4. Avoid loan sharks and repossession.
Debt settlement, is far from ideal; but, the alternative may be much worse. If you are close to defaulting on your payments, this may give you the breathing space to enable making the necessary repayments.
Continue reading →
August 7th, 2007 — debt
If you have a flexible mortgage, making extra mortgage payments can save you substantial sums - much more than the initial cost. Quite often, people don’t look upon a mortgage as debt and so are in no rush to pay it off. However, it is definitely a type of debt and is constantly accumulating interest. If you can pay off your mortgage early, it can be a good financial decision.
There are 2 ways to pay off your mortgage early.
- Making one off lump sum payments
- Making extra monthly payments.
The advantages of making extra mortgage payments can be seen in the above tables, which show the potential to save money and pay off your mortgage early.
Reasons to make extra mortgage payments
1. Pay off mortgage early.
When it is paid off you can put all your resources into investment and savings.
2. Save Interest
The interest on your mortgage is likely to be higher than most saving accounts. Therefore, it is best to pay off mortgage debt at 6%, rather than put into a savings account at 4%.
3. Guaranteed Saving
Stock Market investment has been quite volatile in recent years. Investing in the stock market means you could end up with less than what you started. Making extra mortgage payments is guaranteed to save you money. Speculate on the stock market after you have reduced your huge mortgage loan.
4. Reduce Capital Debt
All the extra payments goes on reducing the capital debt, rather than just paying interest on the loan. For example, in the beginning upto 95% of your monthly mortgage payment goes on just paying interest, very little actually goes on reducing debt.
Continue reading →
July 26th, 2007 — debt
If you are new to ideas of debt and personal finance, don’t panic. It is not as complicated as it first looks. However, it is worth spending time learning the basic of debt and personal finance; it can save a lot of regrets later on. These suggestions and guidance may hopefully appear common sense; however, they can easily be forgotten causing the banks to make more profit at your expense.
1. Never Miss a Payment.
It is important to never miss a payment to any creditor – credit card company, bank, loan company e.t.c. If you do you will be give an adverse credit score. This makes it more difficult to get credit in the future. Banks may refuse to give a loan / mortgage and you may end up paying a higher interest rate.
Top Tip:
- Set up a direct debit to pay the minimum monthly payment. This means you will never miss a payment, even if you forget or it gets lost in the post.
What Happens if I miss a credit card Payment?
- Don’t panic. In the first instance send the full payment. Secondly, contact your company and apologize for the delay. Thirdly, write a letter to the company giving a reason for the late payment; perhaps there was a problem with the post? J If you pay and write a letter of explanation, they may forgive the mistake and not hold it against your credit company.
- Don’t be intimidated by banks and credit companies, you may not believe it but, they don’t like adverse publicity, they like to look good.
2. Find Lowest A.P.R
A.P.R. stands for annual percentage rate. This is the rate of interest charged on your outstanding balance.
Not all loans are equal. The interest can vary significantly. For example,
- A secured loan like a mortgage may have an interest rate of 6%
- A standard bank loan may be 9%
- Credit Card interest could be 17%
- Store Card could be 28%
- Loan shark (unofficial loan to people with adverse credit histories) can be upto 50%
- If your lucky a Loan from your parents / friends might be 0% J
The higher the rate of interest the more your monthly repayments will be. It also means it is more difficult to pay off your loan. This is because a higher % of the loan will go to paying interest and not capital.
Therefore, don’t use credit cards and store cards to hold your debt/ Move this debt to a lower interest bearing loan.
3. Never Bury your Head in the Sand.
There are many people who feel “they know nothing about personal finance”. Therefore, they give this as a reason to justify ignoring their debt problem. However, this only stores up the problem for the future. It is important to always be aware of your situation. If you are fully aware of your outgoings, income and debt it makes it much easier to manage. If you are struggling with your financial situation, don’t be embarrassed or afraid to seek advice.
See also:
July 21st, 2007 — debt
Levels of personal debt have increased significantly in the past 2 decades. It is now easier and more acceptable to get high levels of debt. However, for many people there comes a point where the debt seems unmanageable and therefore, they struggle to see a way out of the debt mountain. These 7 tips show how to reduce and eliminate debt. These 7 different solutions can help you to be debt free within years.
1. Don’t Ignore your debt problem in the hope it will disappear.
It is a mistake to try and forget or ignore the problem of debt. It may seem unmanageable, but if you take a clear and focused attitude you can regain control and work out how to best manage the existing debt.
Continue reading →
