Student Loans

According to a 2017 USA Today article, outstanding student loans has passed credit card debt. Total outstanding student loans at that time were estimated at $1.4 Trillion. Most people believe that student loans are necessary. Once it comes time to pay it back, you need to be educated and know exactly what you have gotten yourself into so you can get yourself out as quick as possible.

If you haven’t started college yet, I want you to look at your options for staying debt-free. Using your savings accounts, shopping for a cheaper college and using available scholarships and grants are great ways to reduce your debt before you even start. Educate yourself on all of these options and the best loans to acquire for your situation.

Once in school you can make a big impact on your student loans. Generally, they don’t need to be paid while you are in school. But, if your loan is not subsidized (income requirements) then they are adding interest to your loan every single month. If you take out a $10,000 loan at 10% and don’t start paying it back for 4 years, you now owe almost $15,000. On the other hand, if you can just pay the interest each month, you will owe the $10,000 when you leave school. On a $10,000 loan, $84 every month pays the interest. So, drive a cheaper car, cut the cable or internet, work a part-time job, don’t eat out regularly. A $10,000 loan is much more manageable than $15,000. Do whatever you can to start paying early.

When you graduate, you now have this student loan bill and don’t know if you can pay for it. So, here’s some ways to get it paid off early.

  1. Consolidate. Be very careful that you use a reputable lender for a consolidation loan. Make sure that it will reduce your interest rate and your monthly payments without extending the loan repayment period. This could be an option to help you pay them off. But, if you understand the debt snowball, you would want to keep some loans small so you can see the progress you have made. If you have a $5,000 loan and a $50,000 loan and you consolidate them, it is harder to see your progress.
  2. Pay more than the minimum. Once you graduate, most loans give you a 6 month grace period before they require repayment to start. If there is any way to start making the payments sooner, please start. The interest is again adding into your balance on the loan. Then, they calculate your payment over 10 years. So, always pay extra even if it’s just a little.
  3. Extra cash. Apply your extra cash towards your student loans. When you get a raise instead of spending the money, immediately increase your payment to the lender. Don’t let yourself spend that money and you won’t miss it. As with any debt snowball you are working toward, any extra cash like bonuses or tax refunds go towards your smallest debt.
  4. Don’t get behind. As with any debt, don’t get behind. Late fees and penalty interest add up to even more. Make sure that you pay the minimums on every loan every month. The government can not only damage your credit like other lenders but they will take your tax refund and can even garnish wages if you don’t pay back your student loans.

Student loans can seem like they will take forever to pay off. But, by paying as much as you can as soon as you can, you will shorten this time. The sooner you pay it off, the less you pay in interest. Just think what you could be doing with that money each month.

If you really can’t afford your student loans, you should talk to the lender about reducing your payments. But, make a budget and try to pay them off.

I offer free phone consultations for setting up your budget. Click on my contact page.

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How to Qualify for a Mortgage

I generally talk about decreasing your debt. But, today, I want to talk about how to qualify for a mortgage. A home can be a good investment in your and your family’s future. I’ll give you four good reasons to own a home but then I’m going to talk about the long-term of how to get there.

  1. Finance. Mortgage payments don’t go up every year.
  2. You’re building equity. Equity is when your house is worth more than you owe. You want to have positive equity as much as possible.
  3. Stability. You don’t need to move all the time.
  4. Tax Breaks. Don’t buy solely for this reason. Due to the Tax Cuts & Jobs Act of 2017 most people aren’t itemizing anymore so they aren’t getting this tax break.

You can use an online Mortgage Calculator to see how much you might qualify for. But, don’t try to buy as much house as any lender tells you you can afford. This is how people get “house poor.” They forget about the extra expenses of living in a house and over-extend themselves on how much they buy. You want to be in a good position when you purchase a home.

If your credit is bad, it could take many years for you to be in a position to purchase a home. But, I like to start somewhere and knowledge is power.

  1. Down payment. There will be a minimum down payment requirement. This can range from 3.5% – 20% of the purchase price. You also need to take into account, there will be extra fees with the loan origination. Focus on #2 and #3 first. Then, you can start saving up for the all important down payment.
  2. Credit score. You want to start by getting your credit score up to 580 and keeping it that high for a year or two. Credit score effects your total loan amount you could qualify for. Credit score can effect the down payment and interest rate that you pay. An optimal credit score will help you buy the most house for your money. So, start paying extra on loans to try to get that score up. This is an area that can take years to build up. But, just start where you are and do the best you can.
  3. Debt-to-income ratio. Calculate this by taking your monthly debt payments divided by your monthly gross income. The acceptable ratio is set by (HUD) not the lender but some lenders may even want a lower ratio. This just tells the lender how much extra money you have each month. Currently, you must be at less than 31% for your housing payments and less than 43% for all debt. Paying off your debts is the first priority if you want to qualify for a mortgage.

In order to qualify for a mortgage, you are going to need to start by controlling your own finances. All of my blog posts have ideas and tips about budgeting and paying off debt. Paid off debt feels so good and can give you freedom to spend your money how you want.

Click on my contact page if you want a free budgeting consultation.


Debt Consolidation & Management

Are you completely overwhelmed by your debts? Credit card debt is so easy to get into but it is very difficult to get out of debt. There are companies and organizations that are able to offer services to help you. How do you know if it is time to get help from others?

Calculate your debts and minimum monthly payments. When you look at your debt and total up your minimum monthly payments, compare that to your income. Are your minimum payments more than 40% of your monthly income? Can you afford to pay more towards your debt each month? Can you sell some things that would help you pay down your debt quickly? Can you sell vehicles if they are unaffordable?

If the answer to these questions are no, you might need to get help with your debts. Two great options are debt consolidation and debt management. You should always be careful, do research and find the best options that won’t just take your money.

Debt consolidation with a credit card. The best option for this is sometimes a 0% interest credit card where you move your high interest loans to this card. The cautions would be to make sure that you can pay off this credit card before you have to pay the interest. And, with debt consolidation, you should be sure to quit spending. If you don’t quit overspending this will just make your situation worse.

Debt consolidation. This is an option if you decide to stop spending on loans and credit cards. This only works if you commit to paying off your loans. Also, you should be cautious with debt consolidation companies. Some of them say to start paying them right away and then they will work with your creditors to get them to accept lower payments. Do your research and make sure that you are using a reputable company. Make sure your other loans are paid off before you start paying for this. These companies can ruin your credit if they don’t fulfill the promises they make.

Debt management. There are also debt management companies. This is where you go in and they help you go over your loans and payments. They will sometimes negotiate with your creditors to accept less money. This can also negatively affect your credit. You should only do this if it is a last resort before bankruptcy. Some companies will help you figure out how to pay down your debt without the negotiation. They will only help you make a plan. They can also help you decide if it is time to declare bankruptcy.

If you are completely overwhelmed by your debt and look at your situation and don’t think you can do anything, you might benefit from the services offered by these companies.

I do offer debt management help and make customized plans to help you learn to manage your debt. Contact me through my contact page for help.

Budgeting, Tips

Understanding Debt & Interest

Do you understand how much you are paying in interest each year on your debts? Understanding debt and interest will help you get motivated to get out of debt. When you see the information, you will see how you could be spending your money in other ways.

Before taking out any loan, you should understand exactly what you will be paying in interest, APR, and how long you will be paying. There are some easy to use debt calculators online that will calculate your interest.

Interest. Interest is the extra amount you will be paying for using someone else’s money. When you have a savings account, interest is the amount that you are receiving for letting someone else borrow your money. Savings rates are usually much lower and so most debt-free people paid off their debt first, then built savings.

APR. This stands for Annual Percentage Rate. This is the interest rate you are paying. You should get the lowest APR you can. APR takes into account any loan fees and compounding interest. When you understand APR and increase your credit score, you can use those as tools to pay less interest. The chart below shows how much interest you pay at different interest rates (in blue). The red shows how much interest you would pay if you paid a $2,000 lump sum payment at the first of the loan but kept paying the same amount.

How long will you be paying for these loans? The chart above calculates interest on a 5 year loan of $10,000. Ask yourself if you can really afford to make those payments for 5 years. By paying upfront of $2,000, you can reduce the payback period. The 20% loan only took 45 months to pay off instead of 60. That is paying the same payment but putting down $2,000 upfront.

If you also add extra payments, you will be out of debt a lot quicker, increase your credit score, and be able to save yourself hundreds or thousands of dollars. It is so important to understand these aspects of debt and interest as you start on a journey to lower/eliminate debt, increase your credit score and learn how to save.

Budgeting, expenses

6 Reasons to Get Out of Debt

Americans feel conflicted about their debt. About eight out of ten Americans have debts. Most people believe that debt is necessary but that they would rather not have it. Today, I will focus on the benefits of being debt-free. Reducing your debt can also help with some of these feelings.

  1. Free up your income. Not having debt payments each month, gives you opportunities to spend your money wherever you want. It also allows more freedom in the kind of work you do. Dave Ramsey posted, “My grandmother always said, ‘There’s a great place to go when you’re broke – to work.'” Debt compels you to work more and harder. If you’re debt free, you are “free” to change jobs, take time off, and enjoy your family more.
  2. Less risk. Many people are one paycheck away from losing everything. Budgeting can help with this. But, also, getting yourself out of debt helps. You’ve learned how to budget, live within your means and you have a savings cushion. Debt-free is a big cushion to get by for many months with smaller income.
  3. Less stress. #1 and #2 are great reasons and they also contribute to less stress. Debt creates stress. You worry about how you’re going to pay all your bills. When you have debt, sometimes, it is difficult to enjoy doing anything because you are worried about your debt. Getting rid of your debt releases a lot of stress. Then, you can spend time with your family, enjoying your work, and find new hobbies.
  4. Better relationships. Do you see the pattern of these reasons all building on the one before? When you don’t have debt, you can enjoy your family more. You can also enjoy all the activities that come with kids even though they are expensive. When you’re not worried about your debt, you know exactly how to pay for those expensive things that come up. I still require my kids to help pay for half of the activities they do once in high school. I think this better prepares them for life. My son plays football and he can’t have a regular job most of the year but he can do a couple of yard clean-ups every month to help pay his expenses.
  5. Helping others. I know that helping others helps you. Debt-free means you can help others. Even if you are still in debt, start finding ways to help others that don’t cost money. You can help people shovel snow, rake leaves, visit with family or friends. Once debt-free, you already know the benefits of helping others and will want to continue.
  6. Higher Self-Esteem and Confidence. I will give an example. One person goes into a dealership to buy a car not even sure of their credit score or how much they can afford. The second person goes into a dealership with cash to buy a car that they have been saving up for and know exactly which one they want and can afford. Buying a car is a high-stress situation but which of these two is more confident when they walk in the dealership? Which one gets the better car even if they spend the same amount? Buying a car is a great reason to be debt-free and easy to see the confidence it will bring to you.

These are only my top six reasons to be debt-free. But, knowing why it’s good and doing it are two different things. Start with a budget. If you can’t make your budget make sense, you should consider talking to a credit counselor. I offer free budgeting consultations. I do not consolidate your debt but I can help you make a budget that works for you. Erin Barbee erin@e3accountingsolutions.com