Most people have debt – 77 percent of Americans, according to the 2018 Northwestern Mutual Planning and Progress study. So if you have some, know you’re not alone. But also know that you need a plan to get out of it. That’s because debt costs you money, potentially a lot of money.
In fact, finally seeing just how much you’re paying in interest over the life of your loans might just be the motivation you need to finally make a big push to pay off your debt so you can spend that monthly payment on something you enjoy.
THE COST OF YOUR DEBT
Let’s say you have a $10,000 personal loan and are paying 8 percent interest over a 10-year loan period. Over the life of your loan, you’ll pay an additional $4,559.31 in interest — that’s nearly half of what you borrowed. If your interest rate is higher, you’ll pay even more than that.
If you have credit card debt, you’re likely throwing even more money at interest. Let’s say you’re paying 19.9 percent on $10,000. If you pay that back over 10 years, you’ll pay $13,111.17 in interest. You’re paying more in interest than what you borrowed!
The bottom line: The cost of debt can add up quickly. So let’s make some moves to reduce the cost of your debt now and get it paid off. That way you can put that money toward something more fun, like your next vacation.
REFINANCE YOUR DEBT
A debt consolidation loan can help you pay off all your debt at once. Some people also use Home Equity Lines of Credit (HELOCs) in order to repay their debt. If you have high-interest debt, these loans offer a lower rate, meaning you’ll pay less in interest.
You might not think that being able to reduce your interest rate by a few percentage points will make much of a difference — but it does.
For example, if you can reduce the interest you pay on your $10,000 loan from 8 percent to 5 percent, you’ll pay just $2,727.86 in interest over the life of your loan. That’s a savings of $1,831.45.
CONSIDER A BALANCE TRANSFER
Another option is to transfer your balance to another credit card. Many credit cards offer 12 to 18 months of no interest when you transfer a balance. That means that you can transfer your credit card balance to a new card and not worry about paying interest for a while. That could give you enough time to repay your credit card debt.
The downside is that after the time period is up, you’ll have to pay the credit card’s normal interest rate on any remaining debt. To avoid that, some people keep transferring their debt to new cards in order to avoid interest for as long as possible while they repay their debt. Be sure to look at the fine print before you transfer your debt, as many cards have balance transfer fees of 2 to 4 percent. And be careful because opening too many cards too quickly could hurt your credit score.
DON’T FORGET YOUR OTHER GOALS
Once you start tackling debt, it can be tempting to start throwing more and more money at it. But don’t lose sight of your other goals. For instance, if you end up contributing fewer dollars toward your savings or retirement, you’ll miss out on the compound growth you get on long-term investments. It’s also important to set aside some money to enjoy today. Getting your debt paid off is great, but it’s not much fun if you can’t still do the things you enjoy.