With only five months left in our 12 months to being debt free challenge, some of you may be hitting a wall in your debt repayment journeys. If the reason behind this is because a big chunk of your repayment goes towards interest every month, then you should consider taking steps to reduce the amount of interest you’re paying.
How do you do that? There are actually a number of ways to cut your interest significantly and accelerate your repayments. I’ll look at some of the most common strategies to help you figure out which is right for you and can help ensure you meet your goal of becoming debt free before you ring in 2017.
Ask for an Interest Rate Reduction
The easiest way to reduce the amount of interest that you’re paying is to simply ask for a rate reduction. Sometimes credit card companies and loan servicers are willing to reduce your interest rate as an act of goodwill – especially if your credit has improved significantly since you originally applied for the credit card or loan and you’ve been making all your payments on time. If they say that they can’t reduce your rate, inform them that you’re looking into other ways to refinance your debt. This could motivate them to offer you a lower rate. It never hurts to ask!
Just starting to pay off your debt? Read “12 Months to being Debt Free” from the beginning!
Refinance or Consolidate Your Debt
Another way to potentially reduce your rates and lower your payments is by refinancing your debt or consolidating it into a new loan. This allows you to take out one loan in order to pay off all or a portion of your outstanding debt. These methods make sense if the interest rate has gone down since you originally took out your loan, or if your personal income or credit rating has improved and you can now qualify for a lower rate. If your debt is mostly on credit cards, then a loan is almost guaranteed to offer you a much lower interest rate.
Refinancing or consolidating your debt at a lower rate will allow you to accelerate your repayments so you can be debt free by the end of 2016. However, you need to ensure your loan servicer will allow you to overpay your loan to quicken your debt repayment. You must also make sure the originating costs and fees involved in taking out the loan are accounted for. A loan servicer or bank will often charge you two to three per cent of the loan balance as a fee to set it up – something that could eat into your savings.
Use Balance Transfer Features on a New Credit Card
Another easy way to get a lower interest rate is by transferring what you owe from one credit card to another. You may find a card which offers a much lower rate than the one you currently hold. In this scenario, it makes sense to transfer your debt because you will save money.
Many cards also offer zero per cent interest or low introductory rates for the first several months – a perfect way for you to pay no interest or very little of it for the rest of 2016. Keep in mind though, it’s important to read all the fine print since there are often fees, as well as terms and conditions that could add costs to your balance transfer and eat into your savings. Also, make sure you know how much you’ll be paying once the introductory period ends, just in case you are unable to repay your debt in time.
Refinance or Get a Second Mortgage
Another way to lower your interest rate is to consider taking out a second mortgage or refinancing your current mortgage. Lenders tend to offer lower interest rates on mortgages since the loan is ‘secured’ by the value of your home. If you have equity in your home, you can potentially refinance your mortgage at a lower rate and take out a little extra to repay your debt.
If you can’t get a lower interest rate by refinancing, but you have equity in your home, you could consider getting a second mortgage just to pay off your debt. But remember, interest rates on second mortgages tend to be higher than on first mortgages. You will also face additional costs, including an origination fee, for both scenarios. Before signing up for either of those options, sit down with a calculator and make sure that it makes sense for you.
While using these methods to lower your interest rate can be effective and can help accelerate your repayments, make sure you’re aware of all the implications of refinancing your debt. For example, you might want to avoid variable rate loans which may start out low, but could rise significantly if interest rates change. A fixed rate loan is better for the security of knowing that your interest rate won’t change over the life of your loan or mortgage.
In addition, if some of your debt is in the form of student loans, refinancing it may not be a good move. Student loans generally have solid benefits that you would lose if you paid them off with something like a mortgage or balance transfer. For example, if you were to lose your job, you can defer your student loan payments but not your second mortgage.
Whatever method you chose, find out everything you can about any additional fees or expenses in order to ensure that it will help you pay off your debt in time to enter 2017 debt free!
Falling behind (no) thanks to high credit card interest? Check out the best low interest credit cards in Canada!