When I say regular payment, I mean whatever payment you’ve regularly been making to your creditors. That’s the amount I want you to use as your regular payment. Keep paying your regular payments to all your creditors while you apply your debt elimination percentage to your highest interest rate debt and work your way down your list per the plan.
Regular Payment Options
You might be confused as to which regular payment option you’re using and whether it’s the best one. Some creditors offer many options, others you’re stuck with just one. Don’t change to a lower payment option thinking that will automatically save you money. Only change your regular payment to a lower amount if it’s because of an interest rate reduction.
Lowering Your Interest Rate
It’s worth a shot. No harm in asking, right? The chances of lowering your interest rate are much better if you’ve been a good customer. Call your creditor and ask them about a lower interest rate, not a lower payment.
Many creditors are more than willing to “help you out” by lowering your regular payment, but if they agree to lower your regular payment without reducing your interest rate, politely decline. That lower payment is a result of extending the term of the loan and re-amortizing the loan payment. They may even try and slip in an interest rate hike too. In other words, you now owe your creditor even more money, setting your debt elimination back even further.
Don’t fall for it. Stick to the old regular payment if you can’t get an interest rate deduction. The best debt elimination plan will still work.
You can also try talking to your creditor’s competitors and see if they’ll give you a better rate. Ultimately, it’s your credit worthiness that determines whether you can successfully lower your regular payment through an interest rate deduction.
Credit Card Payments
Credit cards are the most flexible type of credit as far as repayment options go. That’s one of the biggest problems with credit cards and why they’re so dangerous. On most cards, you have the monthly option to pay as little as 2% of your owed credit card balance, pay off the entire balance, or any amount in between. Remember, anytime you choose to pay off less than your balance owed, that’s a high interest loan.
If you’ve been paying just the minimum payment, that’s OK. Treat that as your regular payment. Once your debt elimination percentage is added to it, your payment will be substantially above the minimum, which is where you want it.
If you’ve been paying more than the minimum payment, keep that elevated amount as your regular payment. You’ll save even more by reducing that high interest debt faster with an even bigger monthly payment.
If you have decent credit, explore trying to lower your regular payment through an interest rate reduction with your current credit card company. If that doesn’t work, explore transferring your balance to another credit card with a lower interest rate. Consider all the costs involved in your analysis.
Federal Student Loan Payments
Before talking about your repayment options for federal student loans, let me repeat a caveat here that has gotten many folks in trouble in the past. With limited exceptions, your federal student loan absolutely must be paid back. Unlike other loans, where your creditor may or may not decide to pursue repayment of your debt in court if you decide not to pay, your federal government will hound you for the money you owe them till the day you die. They’ll gobble up any tax refund you’re owed, even resort to garnishing your wages or social security checks.
Not all student loans are federal loans. Private loans have their own set of payback options, so it’s best to first determine what type of student loan you have.
If it’s a federal student loan, there are multiple repayment options to choose from. The Standard Repayment Plan option amortizes the loan over ten years with a fixed payment. It’s the most economical of the bunch. Unfortunately, the farther you go down their list of options, the more money it’s going to cost you to repay it.
If you’re a lower wage earner and are faced with a ton of federal student loan debt, it’s worth checking out some of the income-based repayment options. Otherwise, stick with your current payment option as your regular payment.
Mortgages are among the most expensive loans to refinance. I hate to sound like a broken record, but you’ve got to be careful when dealing with mortgage brokers, lenders, and other finance professionals. Some lenders make it sound like they’ll refinance your mortgage at a lower interest rate for free. Give me a break.
That’s why APR, which stand for annual percentage rate, is your best friend when looking to refinance. APR not only considers the interest rate assigned to your loan, but also the cost of the loan. Lenders used to be able to advertise a 100% free refinance, then jack up the interest rate. Or, more commonly, advertise an insanely low interest rate and then really sock it to you with the loan fees.
As you might have guessed, like most finance reforms, APR wasn’t introduced by the mortgage industry. It was forced upon them by the federal government to level the playing field a bit with the consumer.
Look for loans with the lowest APR but consider how APR is calculated, especially if you’re planning to pay that loan off early. Loan costs are pro-rated over the length of the loan when computing APR. If you’re actively trying to eliminate your mortgage, you’re probably going to pay off that refinanced loan early, so you may not recoup all your loan costs. This should be considered in your analysis.
For example, say you’re able to reduce your mortgage payment with a 30-year term refinance from 5% to 3%. Assume your loan costs were $4,000 and you plan to pay off your mortgage in another 3 years. Only a fraction of those $4,000 in loan fees will be recouped. It may be more economical to stick with your current higher interest rate regular payment, even with the prospect of a lower regular payment.
If you haven’t made a payment in a while, make sure you contact your creditor right away. Let them know the good news: You’re planning to pay back every penny you owe them. Many creditors are willing to work with you, but it’s you who must initiate the conversation. It’s best to do this before your loan is turned over to collection.
Of course, you need to be wary of any “deal” you may be offered. You’re negotiating with the enemy here. They’re not beneath preying on your desperation. Given your new-found knowledge concerning compounded daily interest and loan terms, try to come up with a reasonable regular payment that’s fair to both parties. Don’t be afraid to negotiate.
Keeping up with your regular payments while you apply your debt elimination percentage to your highest interest rate debt sounds simple, but it’s a powerful strategy that will help get you out of debt in months, not years. Then you can start paying yourself rather than helping boost the profits of some mega-corporation.