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The Real Cost of Debt

Do you know what your debt is actually costing you? A lot of people look at their debt in the form of a monthly payment. For most people, the amount that they spend monthly on credit card debt, car loans, and other debt payments may not look like much when you view this money as just a monthly payment. However, your debt costs you much more than how much you spend each month.

One of the main things to consider when looking at the true cost of your debt is how much you are spending on interest. For example, if you purchase a new car and take out a loan of $25,000 to do so, your monthly payment would be around $347 each month if your annual interest rate is 4.5%. This adds up to an extra $4,194 dollars in seven years. That means your $25,000 loan is actually closer to a $30,000 loan. And that’s just for a car loan. Credit card debt is much costlier because credit cards typically have very high interest rates.

Assume you owe $2,000 in credit card debt on a card that has a 20% interest rate. If you pay $80/month in payments, it will take you 33 months to pay off your debt. Plus, you’ll spend over $600 in interest over that time period. If you pay only the listed minimum payment each month, it could take you many, many years to pay off the debt and you’ll accumulate even more interest over this time.

As you can see, these extra charges add up to a significant amount of money. Over time, the real cost of debt adds up. While you may be able to afford your monthly payments, and therefore think that everything is fine, you could be hurting your overall financial situation by carrying a lot of debt. Could you use an extra $600 or an extra $4,000? You probably could.

That’s not to say that you should never use credit cards to take out loans. Sometimes these methods can be very helpful and even necessary. However, it’s crucial that you consider the overall cost of your debt and that you don’t just focus on the monthly payment when you take on additional debt.

What You Can Do To Reduce Your Debt

If you calculate the real cost of your debt and realize that it’s costing you a lot of money overall, what can you do? One of the best ways to reduce the cost of your debt is by paying it down faster. After all, if you’re charged interest monthly (such as on a credit card) it makes sense to reduce the amount owing as fast as you can to save on interest charges.

Take a look at your budget and see where you can make cuts that will allow you to spend more on debt repayment. Even paying $5 more each month can help reduce your debt faster and save you money on interest charges.

You may also want to speak with your creditors and see if there is anything that they can do to reduce the interest that you are paying on your debt. Be honest. Give your creditors a call and let them know that you are looking for ways to reduce your monthly budget. Some creditors may give you a reduction in interest if they know you’re having trouble affording your monthly costs. This is because they would rather receive less interest than possibly receive nothing if you have to default on your loan.

Another option is consider consolidating your loans into a new loan with a lower interest rate. This can save you money every month and you’ll pay less in interest over the course of the loan. However, the likelihood of succeeding with this strategy will largely depend on your credit rating. Otherwise, if you don’t have good credit, a lender may not offer you a low enough interest rate to make getting a consolidation loan a worthwhile strategy to follow.

If you are having trouble affording your monthly payments, or if the overall cost of your debt is making it difficult for you to afford your other expenses, you may wish to speak with a licensed financial professional.