I don’t need to tell you that time is money. Compound interest is proof of that. When you are serious about getting out of debt, some experts will make you ‘goose-like’ and use a snowball or avalanche to get out of debt. While you live off beans and rice like no one else, ironically like all third world countries interest is added to your debt. The experts won’t put a time limit, but you should. Here’s why.
Life moves fast. it’s time. Financial goals need to be met such as buying a car or house, or saving for retirement. The time it takes you to get out of debt slows down your ability to achieve other goals. The more money you spend getting out of debt the more it slows down this process. What do you do when you’re stressed and backed into a corner? You did everything you could to avoid collapsing facing possible bankruptcy because that would be the worst thing ever, right? read on.
Choice is the cornerstone of the freedom we have in our country. That’s great news that you do have options to get out of debt. First, we’ll explore each option. Then, we’ll look at the numbers using examples of what it costs under each method. From there you can make a better choice of the right option for you.
Debt avalanche (also known as “debt stacking”) targets debt with the highest interest rates first. A debt snowball plan, on the other hand, prioritizes your smallest debt first regardless of the interest rate. Each time the smallest is omitted, you move to the next smallest.
Alternately, consolidation is a new loan that incorporates all debt into the new loan. The average annual percentage rate (APR) on consolidation loans is around 18.56%. As an illustration, the average range of interest rates charged on consolidation loans usually falls between 8.31% and 28.81%. Negotiating and paying off debt for less than the amount owed requires you to pay off part of the debt and then pay taxes on the canceled debt. The main problem with debt relief companies is the fact that they can’t stop lawsuits and wreak havoc on your credit report due to late and missed payments.
You can follow the gurus and use the snowball or avalanche method and pay off your debt when you lose weight on beans and rice. Other options include consolidation and negotiated settlement, paying less than what you owe. Paying less than you owe does come with a tax bill for the canceled one. Each method has pros and cons and affects credit availability. While the interest continues to build up, your credit score drops as you fall further behind and you may even be sued. What if you could find a way to pay off your debt with all these advantages rolled into one? Let’s see the numbers.
Let’s use the example of a person who has a total of $30,000.00 spread across two accounts and student loans. Plus, you can set aside an additional $200 for debt payments after making the minimum payments on all three accounts. 15000
- Credit Card A has a balance of $15,000, minimum payments starting at $285, and an interest rate of 22.25%
- Credit Card B has a balance of $8,400, an initial minimum payout of $150, and an interest rate of $18.85%
- The student loan has a balance of $6,600, monthly payments of $246, and an interest rate of 6.2%
- Avalanche will cost you $881 per month for 5 years paying a total of $44,528
- Snowball will cost you $936 per month for 4 years paying a total of $44,898
- Consolidation will cost you $552 per month for 10 years paying a total of $66,240
- Completion will cost $475 per month for 5 years paying a total of $28,500 including fees and taxes
- Chapter 13 will cost you $500 per month for 5 years paying a total of $35,000 including fees
Now that I’ve laid out the numbers, you can see that the least expensive way to get rid of debt falls between a negotiated debt settlement or a chapter 13 bankruptcy case payment plan. Although debt relief appears to be cheaper than bankruptcy, if a lawsuit is filed, the program will usually write off it’s debt from their program and leaves you hanging. Also, if you want to maintain or improve your credit score, this program is not right for you because debt relief agencies will not make payments on the debt until you have enough cash in reserve for them to negotiate a lump sum. occupancy. So while this may seem like a cheaper way to go, it may not be the best way based on damaged credit scores, tax consequences, and you may still be dealing with debt yourself if you get sued.
The 5 year payment plan in chapter 13 can be proposed to pay less than you owe too, depending on the amount of assets you own and your income. So, the total amount of your debt can be even less. Some of the advantages of chapter 13 include zero interest and no income tax consequences on canceled debts. What’s even better is an increase in credit score because bankruptcy protection means you can’t be sued while paying debts through bankruptcy and because you make payments, you’ll see your credit score improve when you make payments. Now that I’ve laid out the numbers, you can see that the least expensive way to get rid of debt is somewhere between a negotiated debt settlement or a chapter 13 bankruptcy case payment plan. While debt settlement appears to be cheaper than bankruptcy, if a lawsuit is filed, the program usually will remove that debt from their program and leave you hanging. Also, if you want to maintain or improve your credit score, this program is not right for you because debt relief agencies will not make payments on the debt until you have enough cash in reserve for them to negotiate a lump sum. occupancy. So while this may seem like a cheaper way to go, it may not be the best way based on damaged credit scores, tax consequences, and you may still be dealing with debt yourself if you get sued.