Quite often, I focus in on credit card debt as one of the biggest pieces of the puzzle for escaping a bad debt situation, and it is. One area, though, that I often overlook are other forms of consumer debt, particularly those where you purchase an item on a payment plan, then realize when you do the math that the interest rate is obscene.
I was once in this boat, paying off about $4,000 worth of furniture, a huge television, and a high-end computer all on payment plans. The payments seemed reasonable – about $120 a month – but when I first started realizing how bad my debt situation really was, I sat down and started looking at the real interest rates I was paying. Ouch. 30% interest for this computer? 18% interest on the furniture? That’s worse than a credit card!
What I found, though, is that there are different tactics you can use to escape this sort of debt. You don’t have the convenience of just flipping over a card and asking for an interest rate reduction because you’ve agreed to this plan, but you can take advantage of some other features to get rid of this absurd debt much more quickly.
First, read over your agreements carefully. Most agreements allow you to prepay the debt if you wish; in effect, it’s not really that different than a credit card, except the interest rate is tightly fixed and thus so is the payment plan (effectively the same as a minimum payment). If you’re not sure, call the phone number on your last bill and inquire about prepaying. You do not need the money in hand to do this – we’ll get there in a second.
Once you know which ones you can prepay, total up your outstanding balances on those debts. These are usually listed on your statement. You should also note the interest rate on each one – likely the rates are going to be fairly high (above 10%).
Once you have this master list and have added up the debts, collect your last statement on all of them and head to your local credit union. Inquire about a personal loan and ask to speak to a loan officer. When you’re discussing this, show that person the debts you wish to pay off with the personal loan and tell them that the reason you’re doing it is to get the debts paid off quicker. Unless your credit is in shambles, you’ll probably be able to get a personal loan up to a reasonable percentage of your salary quite easily, usually enough to pay off most of, if not all of your debts.
Now, deposit that check from the credit union and pay off those debts! Get rid of all of those debts from your life all at once, leaving you with only one debt to replace them – that to the credit union. This actually should help your credit, as it will show that you’ve paid off several loans.
You’re still left with that credit union debt, though, so don’t let that slide. I recommend taking the amount you were paying on all of those payments and channeling it into this credit union debt. What you’ll find is that since the credit union interest rate is much lower than the payment plans, you’ll be able to pay off this debt much quicker than you would have ever been able to finish off your payment plans.
When everything is paid off, breathe a big sigh of relief, but then take a look at your other debts. Could you not take most of that credit union repayment amount and apply it to your credit cards, your automobile, and so on to get them paid off quicker? Or, if they’re all low-interest debts, maybe you could dump that into your 401(k)?
There is hope, no matter what the situation.