An unfortunate tale
Let me start by saying I’m not Dave Ramsey.
If you choose to have a car loan, mortgage, or credit card debt, that is your decision, and I won’t scold you for it. With that said, I don’t encourage most of these debts either.
You see, debt is a tool. A tool that fancy financiers like to call leverage. A tool that can make you incredibly wealthy or, depending on your luck, judgment, and timing, annihilate your finances for years to come.
Who am I to speak, though? What makes me a debt expert? Well, I used to work as a loan shark and debt collector for a sub-prime/payday lending company. So, to say I know about debt would be an understatement. And, as I have spoken of elsewhere previously, it remains a period of my life that I am not proud of.
I spent nearly a year in that position and quit because I couldn’t look at myself in the mirror anymore. I watched and, at times, helped many people ruin their financial lives with bad debt and poor money management.
Oh, and the lenders encouraged this, too.
The payday loan system essentially forces borrowers to keep returning for more frequent and larger loans until they have few options, spare defaulting, or bankruptcy. Talk about unethical.
However, not everyone falls into this trap, and despite the lenders’ best attempts, some individuals paid off their debts, and I eagerly took notice.
Now, I want to share these lessons with you so that you can escape the debt spiral. Here are the steps you can follow to get ahead financially:
1. Tell Your Lender to Stop Calling You
Repeat business is the lifeblood of personal lending companies.
When I worked at a sub-prime personal lender, my colleagues and I. spent more than half of the day calling current borrowers to see if they wanted more money.
We called it “marketing,” but the practice is nefarious at best.
During these calls, sketchy lenders offer to renew one’s current loan with similar terms.
For example, suppose you took out a $2,000 loan and have paid it down to $1,000 in remaining principal. In that case, your lender may offer to renew your loan to its original principal balance without changing your payment amount (often without re-pulling your credit). From there, you get a check for the difference, $1,000 in this example, and your amortization schedule resets.
Bam, the cycle begins!
So, tell your lender to stop calling you if you are susceptible to these marketing tactics or sales pitches.
Phone communication is heavily regulated, especially for financial firms, and payday lenders cannot call you unless given permission.
2. Refinance or Consolidate Your Debt
As we have seen over the last two years, interest rates affect everything – especially debt.
Depending on your debt’s interest rate, the monthly payment amount and total interest paid over the life of the loan can vary wildly. Consequently, you can save hundreds to thousands annually by refinancing to a lower interest rate. (This is especially true if you have subprime or credit card debt, but this advice also applies to your mortgage and car loan)
Let’s break this down mathematically:
Say you take out a $5,000 loan and plan to pay it off over three years. If the interest rate on your loan is 20%, then your monthly payment would be $185.82 per month, and you would pay a total of $1,678.72 in interest over the life of the loan. But, if you could get a lower interest rate, say 6%, then your monthly payment would only be $152.11, and you would only pay $475.96 in interest over the life of the loan.
That is a big difference that felt even though this is a smaller amount, and that $30 per month saved adds up fast.
Now, imagine the situation above with more substantial amounts and interest rates.
While refinancing won’t clear the debt, it will make it much more manageable.
“But wait, should you consolidate?”
Further, you can consider consolidating your debt if you have multiple personal loans or credit cards. This means that instead of having numerous loans across various lenders, you secure one larger loan from a single lender, using it to pay off your other loans at a better interest rate with only one monthly payment.
Be careful with this, though, and do a little research before making any decisions. And only get a debt consolidation loan from a reputable bank or lender.
Several companies (that I won’t name to keep Olaf from getting angry emails) offer debt consolidation and debt payoff “solutions” (not loans, “solutions”), and I’m yet to see one that isn’t deceptive.
To keep it short, many of these companies collect your debt payments as an intermediary for a fee and then let your debts default. Then, these companies try to renegotiate your debt payoff amounts, ruining your credit while possibly saving you money.
Hence, go with a reputabile banking institution, as this is a terrible choice.
3. Pay As Much As You Can
My final observation of individuals who escaped the debt spiral is that they made extra payments and or paid more than their minimum required payment each month.
Most, if not all, debt accrues interest based on the outstanding principal balance. So, if you pay extra monthly on your principal, you will pay less interest and pay off the loan early.
As a word of warning, though, check with your lender before you attempt to pay off your loan early. It has become less common, but some lenders still charge a prepayment or early payoff penalty.
Depending on the amount of the fee/penalty and the terms of your loan, it may be worth it to pay the fee, but each situation requires individual assessment since there is no rule of thumb.
Payday lenders are not your friend, nor should they be your employer. Most of them pay decently, but their compensation isn’t worth it if you have a conscious.
Further, the predatory system these lenders have created keeps you in debt, leaving it up to you to escape. There is definitely more than one way to beat this system, but I have seen the steps here work for hundreds of people, and I believe they can work for you too.
And, as a word to the wise, avoid debt payoff “solution” companies. Most can and will ruin your credit score.
Getting out of bad debt can be intimidating, but it is achievable.
Create your plan, stick to it, and you will be in a better financial position in no time. The hardest step is initiating the change.
Lastly, as a shameless plug, if you have any questions about debt payoff plans, payday loans, or anything else, shoot me a DM on Twitter or Instagram @JHadawayFC, and we can talk!
Today’s post is my third guest post in a new series where I bring in others to share their thoughts on personal finance. I hope you enjoyed it and please let me know your thoughts in the comments below. If you would like to write a guest post, please contact me! But, without further ado, let me introduce today’s author!
About the author: Joseph Hadaway is a financial coach and a personal finance content creator. After spending some time working for a predatory lending firm, he found his passion for helping others fix their finances and get their money on track. You can find Joseph working on his blog, YouTube channel, and on his podcast, Strive to FI. Outside of finance, you can usually find him working on music, reading a good book, or just outside, enjoying the Florida weather.
Mile High Finance Guy
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