Debt Reduction: Amazing Little-Known Secrets about Eliminating Debt

From the desk of: Keelan Cunningham
Date: February 07, 2012
Re: Debt Reduction...

Debt reduction should be a key focus for anyone with personal debt and especially anyone with personal loans they are finding difficult to pay each month.

Experts recommend debt consolidation loans for recovering control over multiple loans and getting on top of personal money management. However, there are also other amazing little-known Do-It-Yourself steps you can take yourself to eliminate debt faster.

Rising interest rates, multiple personal loans, mortgages, large credit card liabilities and unemployment are making it increasingly difficult for people to meet their monthly loan repayments that, in the good times, weren’t a problem. If this is your situation you will be all too aware that missing loan repayments causes a lot of stress and will result in you developing a negative credit history. This decreases one’s credit worthiness with financial institutions and therefore your ability to borrow. And access to credit and borrowing (used wisely) is essential if you wish to create wealth using Other Peoples Money and develop financial independence and later financial freedom.

Nowadays, many people are going for Debt Consolidation Loans or what they call Secured Personal Loans to get on top of their monthly repayment needs. Generally, these types of loans are a last resort. Debt Consolidation can be used for reducing your monthly debt payments but ultimately you end up paying more interest in the long run. Secured Personal Loans are generally available to people who have a poor credit rating. Secured Personal loans are taken against an asset (generally your home) and therefore present much lower risk to the lender but much higher risk to the borrower as you could lose your home if your defaulted on payments.

Ideally before taking out a Debt Consolidation Loan or a Secured Loan, you should explore other credit management options such as:

1. 0% Credit Card Balance Transfers – this is essentially moving some of your existing high-interest credit card debt to a new credit card provider with a 0% interest rate. Typically, you will get 0% interest on balance transfers of existing debt for 6-12 months. Used correctly, this is one of cheapest forms of borrowing. But the one caveat is that you need to be sure you can pay off the balance before the 0% interest period expires.

2. Paying off Debt Using Savings – it is a much better money management principle to use your savings to pay off debt; the interest on savings accounts is always going to be much less than the interest you pay on loans. There is little point in having savings on one hand and personal debt on the other. When you think about it, you’re basically borrowing from yourself and paying interest for the privilege which is pretty crazy! Having an emergency cash fund is generally thought to be a good idea and I agree. However, one exception is where you have personal debt and an equivalent amount in savings. In this instance, assuming job security and future access to cheap credit is not a concern; it makes much more financial sense to wipe out debt with your savings.

3. Remortgaging – remortgaging (sometimes referred to as refinancing) is basically swapping your mortgage from one lender to another. Your objective is to get a lower interest rate from the new lender. Make sure to check if there are any charges for switching. Remortgaging your home to pay off personal debt is overall a bad idea. The primary purpose of remortgaging is to reduce your interest rate and monthly mortgage payments.

4. Renegotiating – everything in life is negotiable, even debt! Only one thing worries a lender more than not making profit and that’s bad debts i.e. not been able to collect the capital amount lent (never mind the interest). So, you can renegotiate interest rates, payment term, fees, penalties etc. Never take a payment demand at face value. Ask and Negotiate.

Be wary of debt consolidation and secured personal loans. Taking on debt to pay off debt is ultimately a bad idea. Trying to borrow your way out of debt could possibly lead to even greater financial difficulties.

Debt is not a problem but rather the symptom of overspending, over-borrowing and under-saving. It is preferable is to cut day-to-day expenditure and consider increasing the number of hours you work so that you can earn more to pay of your existing debt. Also, why not look at providing more value in your present employment and earn more this way.

Whilst the above 4 credit management options give you suggestions on better ways of accessing credit and managing debt, you really need to change your habits around borrowing, spending and saving and investing money to truly get on top of debt reduction over the long-term.

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