Have you ever felt a little overwhelmed when dealing with your finances? Ever wondered which way is ‘the best way’? What about how to cut out the leech that is interest? You’re not alone. Australia’s personal debt ranks as one of the highest in the world, and it has been steadily rising with no end in sight. Australia’s debt-to-income ratio recently peaked at 212%, which means some Australians are in twice as much debt as what they earn! How’s that for overwhelming?
We, humans, have an inherent desire to consume objects, and this material culture has always been an aspect of our society. In 2019 though, material culture means that young Australians increasingly want it all; to be a home-owner in a happening suburb, with a slick new ride, wearing the freshest of fresh kicks. Pair that with our tendency to love smashed avo and almond milk lattes, and it equals bad news for our financial freedom.
So, are you drowning in student debt? Wading through personal loan statements? Barely keeping your head above your mortgage repayments and living expenses? Fear not! There are ways you can find financial freedom again!
Paying your loan off early is the dream; less interest, less money, less time, less stress. What’s the best way to do it, and what should you consider?
To pay your loan off quickly, here are some tips:
Rule of thumb: If you finish paying off your loan with no credit check early, for example in four years instead of five, you will save money. You won’t pay that last bit of interest. If you took out your loan or credit because of an interest-free period, you also won’t risk rolling into that scary period where interest actually kicks in! Winning!
A debt consolidation loan is essentially where you take out a larger single loan to pay off several smaller loans. It is a form of refinancing. This can be beneficial if you are trying to escape snowballing interest, or if multiple payments are becoming too much for your budget to handle.
One way that many Australians consolidate their debt is through 0% balance transfers. The catch here is if you don’t make your payments before the interest deadline, you could be hit with inordinate rates of up to 22% on the money you still owe. Ouch!
To help you decide if debt consolidation is what your financial dreams are made of, we’ve compiled a pros and cons list:
It goes without saying that it is important to weigh up your options, and decide if the potential savings are worth the costs of consolidating. Be sure to read up on the lender, too.
What works for one person will (almost always) not work for the next. Therefore, we think it’s important to do your own research and talk to others about all of your options. This being said, as well as our other suggestions, there are some further things that you should consider when thinking about paying off your loan quicker than the loan term.
First of all, do you really need the debt in the first place? Your debt may be too far gone for you to even consider answering this question, but it’s still important to think about. If you already have a loan of any kind, it will obviously be of little benefit to add more repayments to your already full banking schedule. Get into the habit of impulse saving, rather than impulse spending.
Secondly, don’t buy into the material culture. If you really want to buy something for yourself, sit on it for two months. If you still want it just as badly after waiting, then buy it. Chances are by this time you’ll have enough of your own money to do so anyway and won’t need to use your credit card.
Unsubscribe from marketing emails from your favourite brands. Delete Instagram accounts that make you feel jealous. Op shop. Re-use. Remember, every little bit counts (and you could inadvertently help the environment, too. Cool!).
Next, ask yourself whether paying off your loan faster than the loan term is really beneficial. If your current repayments are low and you are managing to meet the monthly minimum, sacrificing other areas of your life may not be worth it. With the cost of living rising every year, it could be difficult for you to make extra payments. It’s probably not worth reducing your standard of living just to knock some time off a loan, particularly if it’s only for a small amount.
Also, while this may not be your first choice, sometimes it may be better to just cut your losses. Let’s say you have a car loan. Due to interest and fees that have compounded over the last few years, the loan is now worth more than the car. The car is costing you a fortune to run and maintain. The repayments now seem redundant. Even if you love the car, it may be a better option to sell it and pay out as much of the debt as you can and purchase something cheaper to run./
Finally, the best way to save money on finance is to get the best deal going in, and to understand exactly what you can and can’t do once you have the loan. Will you be charged for making extra payments? What’s the early exit penalty? Are there monthly fees? Read the T&Cs and ask your lender questions.
If you do feel overwhelmed in your current situation, it’s okay to ask for help. The Australian Government’s Money Smart website has helpful tips from banking to home loans to super, and you can trust that the information is up-to-date and well-informed. Compare the Market-style websites, like Finder or Canstar, are also valuable resources when making financial decisions.
At the end of the day, paying off any loan quicker than the loan term is positive; for your pocket, for your credit rating and for your future. If you do find yourself in a position where you need to borrow money, have this as your goal before you even sign on the dotted line. It’s never too late to save money! Who doesn’t want that, right?
Young entrepreneur Daniel Wessels is the CEO and Founder of Jacaranda Finance. Although only in his early thirties, Wessels’ determination and adaptability has led him to successfully pioneer a range of other enterprises both here and abroad.Read More
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