Topic 06 of 20
Loans and debt: borrow less, repay smarter
Debt itself is not a moral failure; for many people a student loan or car loan is what made work possible. The trouble starts when you cannot see what a loan really costs or which one to pay first. This topic makes both visible.
Loans and debt guides
Read any loan by four numbers
- Amount: what you actually receive, which can be less than what you owe if fees come out first.
- Rate: the interest rate, and better still the APR, which folds in certain fees so loans can be compared.
- Term: how many months you pay. Longer terms lower the payment and raise the total cost.
- Fees: origination fees, late fees, prepayment penalties.
If you know these four, you can compare a personal loan, a car loan and a store financing offer on equal terms.
Interest in one example
Two payoff strategies
The avalanche method sends extra money to the debt with the highest interest rate first, which minimises total interest. The snowball method sends extra money to the smallest balance first, which produces quick wins and keeps some people motivated. Both require paying every minimum on time. If you are unsure, the avalanche saves the most money and the snowball is the one some people find easier to stick with.
Student loans are their own world
Federal student loans have repayment plans, deferment and forbearance options and forgiveness programs that private loans do not. Plans and rules have changed several times in recent years, so check current options directly at StudentAid.gov and with your servicer rather than relying on older articles.
When a collector calls
Federal law limits what debt collectors can do: they cannot harass you, lie about what you owe or threaten actions they cannot take. You can ask for information about the debt and dispute it. Never pay a caller you cannot verify; scammers pose as collectors.
Before you borrow anything new
Ask three questions. First, could you wait and save for it instead? Second, what is the total you will repay, not just the monthly payment? Third, what happens if your income drops for two months: can you still make the payment? If the answers are uncomfortable, a smaller purchase or a delay is usually cheaper than any loan.
Debt plan checklist
Tick items as you go. Ticks stay on this page only and clear when you leave.
Questions people ask
Should I pay off debt or save first?
Most people do best building a small emergency cushion first, so a surprise expense does not go back onto a card, and then attacking high-interest debt. Keep making every minimum payment throughout.
Is a lower monthly payment always better?
No. A lower payment over a longer term usually means paying more interest in total. Compare the total cost of the loan, not just the monthly amount.
Can a debt collector contact my employer or family?
Collectors can generally contact other people only to find your contact information, and they generally cannot tell them about your debt. The CFPB explains the limits and how to complain.