Stupid Debt

Sadly it’s incredibly common for people to have debt. If you take on high interest debt that you could otherwise avoid, then it’s stupid debt. There is no easy solution to getting rid of it other than doing a budget so you really have a handle on what you are earning and spending. Try and get the biggest gap you can between the two and then put this money towards paying off the debts that you have. Ideally you want to pay the debts that have the highest interest rate first. Here are some tips to help you avoid taking on debt in the first place:

Know how much you can really afford

Deciding if you can afford something is much more than saying “ït’s only $89 per week”. You will need to work out if you can comfortably afford these repayments over the time period of your loan. Remember you are committing this amount of money for the term of your loan which means you do not have the money for other things which could be more important.

Buy used instead of new

New things are nice, but do they really need to be new? It’s incredible the savings you can make by buying used instead of new.

Work out the total cost of the debt

It is easy to look at the amount per week and say that you can afford it. If you worked out the total amount you end up paying back including principal (the original amount you borrowed), plus interest and any additional costs, you might be very surprised how much the item you want actually costs you. Once you have worked this out, so you still really want it. You may decide it’s really not worth it.

Make the loan for the shortest period you can afford

Loans used to be for shorter periods like 12 month, now they are often a lot longer. This allows you to borrow more because you can stretch the payments out. Longer loans seem cheaper as the regular payments are lower but overall they cost you a lot more. So ideally keep the loan period the shortest you can to lower the total cost of the debt.

Think twice before taking out an interest only loan

Interest only loans can seem very attractive as of course it means you can have something now that you do not currently have the money for. However you do need to be disciplined and ensure you pay the loan off in full by the end of the interest free period or you may find yourself up for some hefty interest costs. Think about practicing some delayed gratification and put aside one twelfth of the items cost and save for a year so you don’t have the loan in the first place.

Beware of being upside down

Being upside down on a loan is where you owe more than the item is worth. This is often the case with car loans, especially on new cars, as they depreciate quickly. If you trade in or sell your car you will have to pay the lender the money that is outstanding over and above paying the loan back. This often stops people selling cars until their loan is paid as they don’t have the lump sum to pay the outstanding balance.

Lisa Dudson is a bestselling author and Registered Financial Advisor with over 15 years industry experience. Lisa offers financial advice through www.acumen.co.nz and co-owns the New Zealand's leading property investment agencies www.ifindproperty.co.nz & www.propertyladder.co.nz