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Reducing Loan Debt

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Reducing Personal Loan Debt

paying down those loans

We use personal loans for going to school, buying a car, financing a home, and purchasing durable goods. Loans are the necessities of life. Your goal is to reduce your loan amounts over time. The trick is to payoff your small loan amounts first, using the freed-up payment amounts to pay down other larger loan amounts.

Page Topics:

identify loans to reduce
worksheet: add it up
calculate: payoff amounts
payoff option1: group payoff
payoff option2: consolidate loan debt
payoff option3: seek debt counseling services
debt ratio and debt reduction guide

Identify Loans to Reduce

Personal Unsecured Loans:

loans used to make small purchases, consolidate debt, and for personal use
generally small loans with balances from $2,500-10,000
interest rates on these loans could be quite high (3 or more points above the prime rate: view prime rate
terms on these loans vary from 3-7 years.

Auto Loans:

auto loans for both new and used purchases
loan balances should be at least $1500 or more
interest rates on these loans are at least 1 or more points above the prime rate: view prime rate
some dealers (and lenders) may offer rates below prime for qualified applicants; some manufacturers may offer "no-interest" loans to move inventory
terms on these loans vary from 3-7 years; some for 8-10 years
the automobile is the collateral for the loan; in other words, the lender holds the title to the automobile.

Credit Lines:

open-ended credit lines that are unsecured and secured (home equity lines)
borrowed balances should be at least $2000 or more
interest rates on unsecured credit lines are at least 2 or more points above the prime rate: view prime rate
interest rates on secured (home equity lines) should be at prime (and in some cases lower than prime for qualified applicants) or more than prime depending on lending factors.

Retail Loans:

loans used for purchasing furniture, appliances and other big retail items
loan balances should be at least $500 or more
interest rates on these loans could be high depending on the payoff terms. In some states, it could be the maximum rate
many of these loans offer "zero-interest" for the first year or in many cases the life or the term.

Caution: if you miss a payment or if a payment is late, the "zero-interest" option will go away and the terms will return to the higher rate with all of the accrued interest
terms on these loans vary from 2-5 years.

RV Loans:

loans used for purchasing recreational vehicles
loan balances should be at least $1500 or more
interest rates on these loans should be at least 2 or more points above the prime rate: view prime rate
terms on these loans vary from 2-5 years; up to 10 or more years for large RV purchases
the RV is the collateral for the loan; in other words, the lender holds the title to the RV.

Student / Education Loans:

two types of student loans:

federal student loans
that include Stafford, PLUS, Perkins and other federal student aid programs

federal student loans should be consolidated under the federal consolidation program to receive the maximum benefit
private education loans
that were obtained from private lenders

private education loans can be consolidated with your other loans (or you can consolidate private loans with an aggregate balance of $8,000 or more into a single private loan consolidation program

see more details at our partner site www.studentloanconsolidator.com

Credit Cards:

open credit card balances can be consolidated with other loan balances
interest rate charges on open credit line balances are at high levels depending on your credit

Debts and Liens:

medical and dental expenses
government and court liens
support payment liens
other imposed debts

Worksheet: All It All Up

Add-Up Installment Loans
Auto Loan 1	$	Auto Loan 2	$
RV Loan	$	Student Loan	$
Student Loan	$	Student Loan	$
Personal Loan	$	Personal Loan	$
Other Debts	$	Other Debts	$

Your total outstanding debt:			$

Calculator: Payoff Amounts

Use these calculators to estimate your payoff schedule and amount - or download this FREE wkst to run your numbers

Use the "Monthly Payment" calculator
to estimate the amount you need per month to payoff your debt over a given period of time (in months).

— enter the best interest rate you can receive
— enter the number of years you need to repay the debt
— press "calculate" to estimate repayment amount
Use the "Repayment Period" calculator
to estimate the time it will take to payoff your debt with a budgeted fixed amount that you can pay each month.

— enter the best interest rate that you can receive
— enter the amount you would like to pay
— press "calculate" to estimate payoff terms
Use can also download our "Debt Payoff" worksheet to run your numbers on your desktop

Monthly Payment Calculation
Total Debt Balance:
Average Interest Rate (APR):	%
Enter the number of months to repay:
^*
Your Monthly Payment

Repayment Period
Total Debt Balance
Average Interest Rate (APR):	%
Monthly Payment:
^*
Amount of Time to Repay	years months
* Calculations are based upon the assumptions you entered. Please note that rounding errors can make a small difference in calculations. The circumstances surrounding your credit and loan qualifications may result in different calculations.

Option #1: Group Payoff

Use this option if you have minimal loan debt that can be paid-off within 12-36 months

Is this the right option for you:
this may be an ideal option if your budget allows for an extra amount to be used to quickly payoff your loans.

You may consider consolidating your existing loans under a lower rate and budgeting the same amount to payoff your consolidation loan: See Option 2: Consolidate Your Loan.

First thing: analyze your budget:

analyze your monthly budget to determine how much money you can allocate for this payoff plan.

Link to our budget planning module

Identity and list your loans:

use the FREE desktop worksheet to identify each loan
that you would like to payoff. List the loans in order from the lowest loan balance to the highest.

Let's illustrate this concept by using the following loan worksheet with a period of 5 years before the final loan is paid (assuming no additional debt):

Balance Payment Rate

Loan1 $800 $32 12.5%

Loan2 $1200 $40 12.5%

Loan3 $2777 $67 12.5%

Loan4 $8530 $175 8.00%

Loan5 $18997 $453 6.75%

Total Period to payoff final loan: 5 years

Group your loans:

group at least 2 low-balance loans together and pay them off within 6-12 months.

You may use a credit card transfer program to get the low transfer interest rate during your payoff period.

These card transfer programs allow you to transfer any outstanding debt balance that you may have over to this card that has a very low interest rate for an introductory period of time.

Once you payoff these two loans, group the next low-balance loan and pay it off quickly over 12-24 months.

This payoff grouping builds a momentum where you erase 1-2 loans quickly from your monthly payment plan. The savings can then be applied to other monthly loan payments to reduce your aggregate loan balances quickly.
Example:
Take the first two loans on your list (Loan1 and Loan2) and group them together (balance of $800 and $1200).

Set a budgeted payoff plan within 9 months:

— your payoff balance: $2000
— current debt payment: $72 ($32+$40)
— additional pay needed to payoff within 9 months: $162
— (see calculation)

— total monthly payoff amount: $234 ($72+$162)

The extra $162 per month will need to come from budget planning by reducing other monthly expenses.

Note that you will still continue to pay the minimum monthly payments on your other outstanding loan debt.

Payoff and group again:

Once you have successfully paid off the two loans in 9 months, your current loan portfolio will look like this (assuming no additional debt was added and minimum monthly payments were made to reduce your other loan balances):

Balance Payment Rate

Loan1 $0 $0 12.5%

Loan2 $0 $0 12.5%

Loan3 $2372 $67 12.5%

Loan4 $7308 $175 8.00%

Loan5 $15450 $453 6.75%

Now take the next loan and apply the same payoff proceeds to this loan:

— your payoff balance: $2372
— monthly payoff amount: $301 ($234 from above + $67 current pay)
— time needed to payoff: 8.3 months (see calculation)

Now after 9 months, you current loan portfolio looks like this (assuming no additional debt was added and minimum monthly payments were made to reduce your other loan balances):

Balance Payment Rate

Loan1 $0 $0 12.5%

Loan2 $0 $0 12.5%

Loan3 $2372 $67 12.5%

Loan4 $7308 $175 8.00%

Loan5 $15450 $453 6.75%

Continue payoff:

Continue your group payoff by taking the next loan and applying the same payoff proceeds:

— your payoff balance: $6004
— monthly payoff amount: $476 ($301 above +$175 current pay).
— time needed to payoff: 13.2 months (see calculation)

After 13 months, your current loan balance will look like this:

Balance Payment Rate

Loan1 $0 $0 12.5%

Loan2 $0 $0 12.5%

Loan3 $0 $0 12.5%

Loan4 $0 $0 8.00%

Loan5 $6079 $453 6.75%

apply the same payoff proceeds to payoff your last loan:

— your payoff balance: $6079
— monthly payoff amount: $929 ($476 above +$453 current pay).
— time needed to payoff: 6.9 months (see calculation)

Summary:

by grouping low-balance loans together and budgeting an additional $162 for debt payoff, you were able to eliminate this debt within 3 years. That is two years less than allowing these loans to run their term.

The magic of grouping is that it eliminates low balance loans quickly so that you have the additional funds to pay down your next loans.

You can achieve the similar payoff time if you allocated an additional $162 each month to pay down a consolidation loan. See example under Option 2.

Grouping works best when you develop a spending plan that meets your budgeted allowance for living and debt payoff.

See our topic on budget planning

Option #2: Consolidate Your Loan Debts

Use this option to consolidate your loan debt under one repayment plan

Is this the right option for you:
this may be an ideal option if you can consolidate your loans under a repayment plan that offers an interest rate that is lower than the weighted interest rate charges on your existing loans.

Estimate your weighted interest rate:

1.	a: enter each loan balance that you want to consolidate b: enter your loan debt interest rate c: press calculate. it will multiply the balance by its current interest rate to give you a weighted factor for each loan:

	Loan Amt	Interest Rate	Weighted Factor
	X	% =
	X	% =
	X	% =
	X	% =
	X	% =
	X	% =
	X	% =
	X	% =


2.	Sum the factors together to get a weighted average:

3.	Sum the outstanding balance of all loans:

4.	Divide the weighted average by the loan balance.		%

5.	The interest rate on your consolidation loan must be lower than this "weighted interest rate" to benefit from an overall lower consolidation interest rate.

6.	You can remove low-interest rates loans from your list and pay them off separately. Then calculate your weighted average to consolidate your remaining loans.

7.	Link to our Debt Consolidation Worksheet to estimate your repayment plan using a debt consolidation rate and term.

No obligation debt consolidation solution

Apply now and let's search
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Consolidation example:

Let's assume that you had the following loans that will take 5 years before the last loan has been paid off.

Balance Payment Rate

Loan1 $800 $32 12.5%

Loan2 $1200 $40 12.5%

Loan3 $2777 $67 12.5%

Loan4 $8530 $175 8.00%

Loan5 $18997 $453 6.75%

Total $32,304 $767

Total Period to payoff final loan: 5 years

If you consolidated the above loans under a consolidation rate of 7.00% with a 10-year repayment plan, you would save around $392 each month over current payments.

Total current monthly payments on our debt: $767 (see example above)

Total monthly payment under a 7% consolidation with a 10-year term: $375.08 (use calculation)

Monthly savings: $392 ($767 minus $375)

These savings can be applied as an extra amount each month to pay down your consolidation loan within 4 years — 1 year earlier if you didn't consolidate.

Consolidation Loan: 10-yr Repayment Term

Balance Payment Rate

Total $32,304 $375.08 7.00%

Savings (extra pay) $392.00 ($767-$375)

Payoff 48 months if you made payment of $767 each month

If you budgeted an additional $162 as illustrated under Option 1 above, you will be able to eliminate this debt within 3 years. You can run this calculation by using our loan payoff worksheet.

Current Outstanding Loans

Balance Payment Rate

Loan1 $800 $32 12.5%

Loan2 $1200 $40 12.5%

Loan3 $2777 $67 12.5%

Loan4 $8530 $175 8.00%

Loan5 $18997 $453 6.75%

Total $32,304 $767

Current Outstanding Loans

Balance Payment Rate

Total $32,304 $375.08 7.00%

Savings $392.00 ($767-$375)

Payoff Amounts

Current $375.08 (loan consolidation payment)

Extra1 $392.00 (savings)

Extra2 $162.00 (budgeted amt)

Payoff 38 months with payment of $929.08 each month ($375.08 + $392 + $162)

Option #3: Seek Debt Counseling Services

Use this option if you are unable to payoff your loan debt

Is this the right option for you:
use this option if you find yourself unable to repay your current debt balances and want to avoid bankruptcy.

This may be the right option if circumstances such as unemployment, loss of income, or other unfortunate event prevents you from repaying your debts.

This option is also recommended if you have collection agencies threatening action. Counseling services can advise and protect you from adverse action.

Credit counseling services:

credit counselors will be able to discuss your situation with your debt lenders to either forgive part of the debt or structure a repayment plan that fits your budget.

They will also work with you to establish a monthly repayment plan that fits your budget.

How the program works:

you first complete an enrollment form that authorizes the credit counselor to discuss your situation.

No obligation debt counseling professional

Submit now and let's search
for the right debt counselor

the credit counselor will contact your creditors to negotiate a repayment plan that is significantly less than you currently pay — why? creditors will welcome partial payment rather than no payment.

credit counselors will then setup a monthly repayment plan that works for you

you will then make your monthly payments to the credit counselor who in turns divides the payment among the creditors based on the negotiated repayment amount

in most cases, creditors will inactivate your credit cards to avoid charging additional debt.

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