Spring cleaning your debt

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Spring is a good time to evaluate your debit situation and try to reduce and/or eliminate any debt obligations you may have. The following are some tips to get you started.

Determine whether it makes sense to refinance

If you have consumer loans, (such as a mortgage or auto loan) take a look at your interest rates. If you are paying higher-than-average interest rates, consider refinancing. Refinancing to a lower interest rate can result in lower monthly payments on a loan and potentially less interest paid over the loan’s term.

Remember, refinancing often involves its own costs (e.g., points and closing costs). Factor these costs into your calculations of how much refinancing might save you.

Consider loan consolidation

Consolidating your loans into one loan has several advantages, including making it easier to focus on paying down your debt. Also, you may be able to get a lower interest rate or extend the loan term on a consolidated loan. Keep in mind, that if you do extend the repayment term on a consolidated loan, it could take you longer to get out of debt and ultimately you may end up paying more in interest charges over the life of the loan.

Look into taking out a home equity loan

If you own a home and have enough equity, you may be able to use a home equity loan to pay off your debt. The interest on home equity loans is often lower compared to other types of loans and is usually tax deductible.

However, there are some disadvantages to consider. If you end up having an available line of credit with a home equity loan, you’ll need to be careful not to incur any new debt. Also, your home is potentially at risk since it serves as collateral for the loan.

Evaluate whether you should invest your money or pay off your debt

Another effective way to reduce your debt load is to take cash that you normally would put toward certain investment vehicles and use it to pay down your debt. Compare the current and anticipated rate of return on your investments with interest you would pay on your debt. In general, if you would earn less on your investment than you would pay in interest on your debts, using your extra cash to pay off your debt may be the smarter choice.

Come up with a payment strategy to eliminate credit card debt

Some options:

  • Making lump-sum payments using available funds such as an inheritance or employment bonus
  • Prioritizing repayments toward cards with the highest interest rates
  • Utilizing balance transfers

Whenever possible, make additional payments

Making payments in addition to your regular or minimum loan payments can reduce the length of the loan and the total interest paid. This is especially important when it comes to credit card debt. If you only make the minimum payment on a credit card, you’ll continue to carry the bulk of your balance forward for many years without actually reducing your overall balance.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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