Lesson One: Reduce Your Debt
With the American economy, along with many of the major world economies, on a downward spiral, money worries and stress are at an all-time high. Thus, it is no surprise that millions of people are turning to ways to reduce their debt at an accelerated rate.
DebtZero will teach you the tried and true principles that wealthy people have been using for decades. If you make the commitment to become the master of your own destiny, and apply these principles, you will achieve success.
Part 1: Debt Negotiation Pros and Cons
Debt negotiation comes in many forms. These include: payment extensions, interest rate reductions, and different repayment schedules. Another form of debt negotiation which is becoming more common today is to actually adjust the value of the loan. One common manifestation of this is today’s popular loan modification strategy.
Before you look into debt negotiation, you need to understand that if you are not two or more months behind in payment the lender will usually not be interested in negotiating. This is because there is not much reason for them to do so yet.
Now on to the pros and cons of debt negotiation.
Pros
# Debt negotiation can have a nearly instantaneous impact on your total debt load and the amount you pay each month. For example, a good loan modificationcan cut your monthly mortgage payment by as much as 30% or more. It could also reduce your interest rate by several points, thus affecting your monthly budget as well.
* If you use a professional (only in cases where the fees of the professional are outweighed by the savings you will realize from the negotiation process), they will go through the process for you and will do their very best to get the most advantageous results for you. This saves you a headache and allows you to continue doing what you can to keep your income flowing steadily.
Cons
* Debt negotiation often, but not always, negatively impacts your credit score. However, through negotiating debts, you might be able to get on the road to being debt-free a little faster. When you pay off your debts quickly, you can improve your score.
* Negotiating your debts can be a major headache and hassle. It takes time, quite a lot of know-how, and serious dedication to the cause to be able to finish the process and have a positive outcome.
* Since debt negotiation can be such a headache and is often very complicated, you will likely need to turn to a professional for at least a little help.
Professionals usually cost a lot, and if you are already in severe financial distress, this is a tough thing to handle.
Summary
It’s pretty clear that debt negotiation can be a good option for those whose debt burden is too heavy to bear or for those who are nearing bankruptcy.
Remember that arbitration means that you and your lender will each have a representative and they will usually negotiate and decide upon a settlement between them. Be sure to understand the process, as well as the settlement resolved upon before you accept any offer.
A final note on debt negotiation: If you go into the process believing that your debt will be forgiven, think again. At best your loan terms will be adjusted so that you can pay the lender at least a portion of the money you promised to pay back.
If debt negotiation looks like too chancy of a prospect, or like it might be more than you feel confident in being able to accomplish, fear not. There is a better way to reduce your debt at an accelerated pace.
Part 2: Accelerate Your Debt Payoff
Option two for debt reduction involves the application of a simple, yet tried and true, principle with many names. It has been called a roll-down, a roll-up, a snowball and several other strategies.
This principle essentially requires that you change some of your current spending habits without spending any more on debt than you do at this time.
This powerful principle is best illustrated through an example. Let’s say that this table is a person’s debts
| DEBT | Balance | Interest Rate | Monthly Paymt. |
| Car Loan 1 | 13,560 | 7% | $340 |
| Car Loan 2 | 9,400 | 9% | $200 |
| Discover Card | 3,100 | 16% | $80 |
| Mastercard | 850 | 18% | $50 |
| Student Loan | 23,900 | 1.50% | $150 |
| Mortgage 1 | 189,000 | 6.25% | $1,200 |
| Mortgage 2 | 49,000 | 7% | $800 |
| Total Monthly Payment $2820 | |||
If you simply follow your lenders’ plan for your debt pay-off, you will simply be making minimum payments, accruing interest steadily, and will basically be under great financial stress.
So let’s begin with the current monthly payment toward debt: $2820. Remember that lenders want to keep your balances up for as long as possible, because that’s how they keep earning money.
You want to get rid of balances in a hurry.
Your best bet is to restructure your payments so you get rid of balances quicker, and you can do this without paying anything extra toward debt.
What would happen if you paid $50/month toward your student loan for six months or so, and took that extra $100 and applied it toward your Mastercard?
Your Mastercard would be paid off in six months. Then you commit to not carrying any balances on that card ever again. Dave Ramsey would tell you to cut up the card and use cash only, we tell you to hold onto it so you can use it more wisely down the road.
With your Mastercard paid off, now you have $150 that you can apply to another debt. Shift that $100 back to your student loan, and then apply $50 to your next credit card.
Adding $50 to your Discover Card payment is going to pay that balance off several months early, thus freeing up another $80 dollars to apply toward another debt.
Now you’ve got no balances on credit cards, and you are applying the $50 from the Mastercard and the $80 from the Discover Card to another debt… say your first car loan. So now instead of paying $340 on your car loan each month, you are paying $470!
Your balance will reduce quicker and interest will not accrue as fast on that shrinking balance.
This is called a debt roll-up, or a snowball.
Obviously, you still have to pay off your debts, and what is equally obvious is that you will still be in debt for several years. However, consider what would happen if, in 4 years, you paid off every debt except your two mortgages.
You will have freed up an extra $820 that you can pay directly toward mortgage principal every month. Now you’ve accelerated your mortgage pay-off to incredible speeds! In fact, you will be paying an extra $9840 towards your mortgage principal every year!
With the principal shrinking so fast, interest will accrue slower and you will be saving even more money. At this rate, you are going to be out of debt in about nine more years.
That’s right, you will own your homes straight up and you will not have any other debts in about 13 years!
There is plenty to more to say about debt pay-off, particularly about some advanced debt modification strategies. We will cover those issues in future lessons.