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Home Is Debt Evil?
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Written by Administrator   
Wednesday, 25 March 2009 02:54

Debt consolidation and reduction

A big question that many people ask when they have some money to invest is whether they should actually invest it or should they pay off or pay down credit cards and loans instead? Here I will try and take a closer look at this problem, since often paying off debt is a money management strategy that is used in conjunction with investing.

Is debt evil?

Is debt really evil? Well maybe not evil, but it can definitely be bad! Especially when it comes to credit card debt. Not just because of high interest rates, but also because many people often use credit cards for routine living expenses. This type of debt can make you a slave. It can even ruin your life if it gets too out of control. Imagine owing thousands, tens of thousands or even hundreds of thousands of dollars for things like food, vacations, clothes, etc. - things you may have long forgotten about, or don't even own anymore. Yet you still owe your bank for these things, plus you are paying them interest on top of it.

If you are living paycheck to paycheck because of this, you are a slave to your debt. You cannot afford to quit your job or spend money on anything else... you're stuck and it seems like there's no way out. So yes, in this context debt is a bad thing and can make your life miserable. People should do everything in their power to avoid this situation, or take steps to get out if they are already there. Some things that can help reduce debt or lower payments are a debt consolidation loan, or even debt negotiation with creditors (see below for more information).

 

Would you pay someone $11,800 so you could borrow $5,000?

When it comes to credit cards and other debt, more often than not people are paying interest rates that are way too high. On many credit cards and loans, interest rates of 10%, 15%, 20%, 25% and even higher are not uncommon. Think about that, 20%+ interest. Yikes! And this doesn't even include the occasional late fee or over-the-limit fee that many people incur from time to time. If you are one of these people, and you happen to come into some money to invest, you have to ask yourself - does it make more sense to invest the money, or use it to pay off debt?

Here's something to think about which may be an eye opener for some: if you have a typical credit card, with a fairly common interest rate of 18%, and you charge $5,000, and then make monthly payments of $100 until you pay it off, you'll end up paying over $11,800 in interest just to borrow that $5,000! Oh and let's not forget you'll still have to pay back the original $5,000 you borrowed, so you'll have to come up with a total of over $16,800. AND, here's the worst of all - it will take you over 32 years to pay it back!! Is that insane or what? If you want to read more on the costs of debt, I found an article at Yahoo finance which is worth a look if you have time.

Unfortunately, most people tend to only look at the monthly payment and not the total cost of what they are buying, plus interest. As long as they can afford the minimum payment, they don't really consider what they are actually paying in the long run. But as you can probably see, this is a situation to avoid at all costs!

Should you invest your money, or pay off debt instead?

For most people, the quicker they can get out of debt and stay out of debt the better. Because once you get out of debt, you can start investing and making money rather than paying it out in interest. Just think, wouldn't it be great if you could invest $5,000 and earn $11,800 instead of paying it? You bet it would! However, the fact is that some people are more comfortable with having some money invested and still carrying some debt. Which is understandable. Nobody can predict the future, and having some cash put away for emergencies can give many people a feeling of security. If this is you, maybe a compromise is to invest half of your money, and use the other half to at least pay down debt?

Debt consolidation may lower your bills!

If you are serious about paying down your debts or even getting out of debt as fast as possible, one thing that can help is a debt consolidation loan. This is a loan that is made by paying off all your credit cards, and then rolling the balances into one loan. The interest rate is much lower than what credit cards charge, so often your monthly payment is lower and you will pay off your debts faster. What could be better than that?

I strongly urge anyone with debt to look into this type of loan.... there's no reason to pay your bank higher interest and give them more of your money if you don't have to! Soon I will be listing resources which you can refer to for more information on debt consolidation loans and general information on debt management. Look for it soon!

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Last Updated on Sunday, 29 March 2009 17:23