Consolidating Debt – Jamaica

by Jan 14, 2021Economic Topics, Financial Research

 How To Reduce Your Debt

You find yourself overwhelmed with debt and you don’t know what do or where to start. Many of us have arrived in this position and feel like there is no way out. There are success stories of persons who have turned around their life and managed to significantly reduce their debt by putting a plan in place. Always speak to a qualified professional about any financial move you are contemplating (that may be a bank loan officer, investment advisor etc.) but this may assist in guiding you along the right path and knowing what options exist.

I want to highlight some of the successful debt consolidation or debt reduction strategies and provide some tips on to ensure you do not return to that place if you manage to get out.

So why does anyone need to reduce/ consolidate their debt? If you cannot meet your monthly expenses, not paying your bills can have a negative impact on your credit score and thus your ability to borrow in the future and your ability to create wealth. Consolidating or reducing your debt can:

  • Assist in improving your credit score 
  • Pave the way to allow you to qualify for bigger loans like an auto loan or mortgage
  • Allow you to have more financial freedom to manage your expenses
  • Pave the way for more savings/investments and to build your nest egg.

 

So what is a strategy that persons employ to consolidate their debt?

Borrowing from Peter to Pay Paul

You may not think it is intuitive that to get out of debt you need to borrow MORE. Borrowing to pay off debt can be a successful strategy if done correctly. Have you ever heard the saying “Borrowing from Peter to pay Paul?” I’m sure you have only heard this phrase in a negative context, but when Peter’s interest rate is 7% and Paul’s rate is 37%, then it may make sense to get a loan from Peter to help to reduce your debt obligation to Paul. In this example Peter is offering you an unsecured loan with monthly installments whereas Paul gave you a credit card with mounting fees and charges and no end in sight to reducing the debt owed.

Many banks offer debt consolidation loans to assist their customers in reducing their high interest rate debt, to lower more management payments.

 Let’s Translate!

Let’s look an example. You have a credit card with a $200,000 balance outstanding and a minimum payment of only $6,000. You are being charged interest at a rate at an Annual Percentage Rate (APR) of 40%. Assuming you only make the minimum payment and you no longer make additional purchases on the card it will take you 8.75 years to pay off that debt.

Say you converted that loan to an unsecured loan at 10% interest rate, it would take you 40 months or 3.3 years to pay of the same principal balance. That’s why other lower interest loans (unsecured loans, mortgages or home equity loans or other collateralized debt) are more attractive to replace high interest loans like those associated with credit card debt.

You can even review your student loan interest rate (locally or abroad) to see if it is even 1% higher than the rate for an unsecured loan from a bank. The lower interest rate is more beneficial to you over the same time frame.

If you have multiple loans with higher or varying interest rates in comparison to the rate that you get for a personal loan at the bank, then it may make sense to repay them and opt for one low interest rate (personal) loan instead – a debt consolidation loan. Your total loan repayment will be lower, which reduces your expenses and give you more cushion to

Again, speak to your financial institution about what options exist to consolidate your debt.

 

Tips to Keep Your Debt at Bay:

  • Pay any credit cards off in full. Only spend what you already have to repay to be safe. Avoid them altogether if you do not have the discipline. They can be a good tool to use to build your credit but can be devastating if the debt spirals out of control.
  • A zero-interest balance transfer is a product that you can explore if you would like to keep a credit card but have a lower interest rate on the card. Look for a bank that has this option and has lower rates on their credit card products.
  • Be aggressive in your repayment plan. Pay off as much as you can as soon as you can.
  • Repay your debt obligations on time. It will make a difference in your credit score which as I mentioned before, is important for you to improve to access credit in the future.
  • Pay high interest loans first
  • Try to create a budget and stick to it. Don’t spend more than you earn. My budget template and expense tracker on  https://financialcentsibility.com/calculators/ can help you to understand exactly what you are earning and what you are spending so you can know where expenses can be cut.

Start assessing your financial position today so you can reduce your debt and save/invest more!