How To Get Out Of Debt

There have been several ways I have read of how people can get out of debt. There has also been several ways I have witnessed people getting out of

debt and there has been the method I have personally used to get out of debt. I think it’s worth discussing all three because different methods work for different people.

 

The main way you read about and I have written about this myself is to write down all of your debts in order of interest rate cost and pay the debts off first with the highest interest rates. Another commonly written about method is the debt snowball. Where you only look at the size of the debt. Rank all your debts in order of size and pay off the small ones first then as you build confidence and momentum you pay off all the debts in a snowball rolling down the hill fashion. There’s actually entire books dedicated to this, and in my book I even explain which debts are likely to have the highest interest rates. Below is an extract of a table regarding the order of debt.

 

TYPE OF DEBT	APPROXIMATE RISK PREMIUM	EXPLANATION
Mortgage	Cash rate plus 1%	The bank takes the property as security over the loan. This is        considered a secure asset. The deposit on the loan will vary (sometimes no deposit is needed        – see mortgage insurance discussion This applies to owner occupied properties and to investment        properties (though investment properties may have a higher risk        premium). A typical mortgage loan terms is 25 to 30 years.
Commercial Debt	Cash rate plus 1.7%	Commercial        loans usually require a 30% deposit and they charge a large “application        fee” of at least 1%. These        loans are secured over assets of the business, this is referred to as        “commercial security” Loan terms        are typically up to 15 years for commercial debt
Secured Personal Loans	cash rate plus 2-3%	Secured personal loans are secured by something other than        property. This could be a car (car loan), shares (margin loan), art, boat or        other asset. Loan establishment fees are typically smaller than for a        commercial loan Loan terms are usually shorter than mortgage and commercial loans,        for example, a typical car loan would be for five years.
Unsecured Personal	cash rate plus 5%plus	Unsecured personal loans are loans that are not tied to any        specific asset (hence the name, “unsecured”). As well as bank loans, this type of loan includes store cards and        offers from furniture and white good stores. This can be an expensive form of debt and is usually short term,        up to two years, and for smaller amounts. While a standard premium might be 5% above the cash rate, some of        these loans can be as high as 25 per cent This is a very expensive form of debt and not the kind of debt        people want for long.
Credit cards	0 to 22%	Credit cards are a type of unsecured debt. They have their own fee and interest structure Typically there is an annual fee, an interest free period, a        minimum monthly repayment and an interest charge The cost of these charges can vary dramatically depending on the        terms and conditional of the credit card.

The ways I have witnessed people getting out of debt was when I was assisting a videographer who was making a video for a charity that assisted people in severe financial difficulties   they had free financial counseling and temporary housing and budget coaching until they learned how to budget for themselves. All their bills were negotiated until they were paid off. I will never forget one mans face when he said “being able to control your finances is better than having a Porsche”  he said it was such a wonderful feeling

The method that has worked for me personally is to get all my debts written down and to work out the minimum payments and to pay more. That

way the debts got paid off. Most minimum payments are so low that if you just paid them the debt could last 25 years especially credit cards

If you double the minimum payment and then work things out it can often pay of the debt six times faster

Which ever way you choose to get rid of debt it’s a wonderful feeling when you succeed.

The even sweeter thing is you can save money to invest using the extra money you now have from not paying off debts that are now gone!