mommyme asked:
I was just about to get a home equity loan, however most of the advice I got on here said no. We checked on it an the interest rates are variable- which I dont like. Anyway we decided to try the Dave Ramsey system(cut up credit cards, pay cash etc). If anyone has any advice on how to do this more quickly etc please Help.
Susan
I was just about to get a home equity loan, however most of the advice I got on here said no. We checked on it an the interest rates are variable- which I dont like. Anyway we decided to try the Dave Ramsey system(cut up credit cards, pay cash etc). If anyone has any advice on how to do this more quickly etc please Help.
Susan
Jean
Good idea. Many people with home equity loans no longer have a home. Variable rates are especially evil.
Comment by paul — July 6, 2010 @ 2:35 pm
Dora
Do it quicker than Dave Ramsey? I doubt it. You would have to significantly increase your income and reduce your expenses. Can you do that?
Comment by David M — July 8, 2010 @ 1:53 pm
Jessica
In May of this year interest rates may be going up again.
If you get a variable rate – be ready for your interest on your loan to double, maybe even triple.
I am mad at banks for still offering these loans.
They are taking advantage of the poor and desperate.
/
Comment by Judy — July 11, 2010 @ 5:06 pm
Francis
It’s simple. Live really cheaply (live like a really poor person would) and try to increase your income (extra part-time jobs, rent out extra rooms in your house).
Comment by mguardian_north — July 11, 2010 @ 8:39 pm
Renee
You can repay debt faster than Dave Ramsay. Way faster.
As far as I know, (I could be wrong) Dave Ramsay promotes a plan where you clear the smallest loan first. Now, that’s great for your self esteem, but mathematically, it might not cut it.
Here’s why.
When you have debt, the interest rate is the most important thing. A rate of 19% means you’re paying $19 per $100 owed per year. So obviously, you don’t want a high rate, you want a low rate. A low rate means you pay less in interest over a year per dollar owed. So 6% would mean you had to pay $6 per $100 per year? Catch my drift?
Now, if you have multiple loans, it might be tempting to clear the smallest one first. That might be good for your ego. You might feel like you’ve achieved something.
However, look at your overall debt burden. If you have multiple loans, and some of them have high interest rates, you’re better off paying off (or at least reducing the amount owing) on the higher rates, because, per dollar borrowed, they will cost you more. For example:
Say you have 2 loans.
$10 000 at 19%
$5 000 at 7%.
Now, with Dave Ramsay’s plan, you might be tempted to repay that $5000 pronto, while making minimum repayments on the other loan. But because the rate on that $5000 is only 7%, it’s not nearly so bad as the rate on the $10 000, which is $19. In fact, the smallest loan is only costing you $350 a year. The larger loan, at the larger rate, is actually costing you $1900 per year. Extra repayments on the higher interest rate debt will save you more in interest.
Even if the amounts were the same ($5000) the 19% rate would cost you $950 a year. So your extra repayments, which would reduce the amount outstanding (and give the bank less money to calculate your interest bill from) would be better spent on the debt with the highest interest rate.
So when you try to clear multiple debts, it is very important to pay minimum repayments on all debts, but save your extra repayments for the one with the highest interest rate. Once that high interest rate debt is gone, you then move your extra payments (which will be larger now — that’s like Dave Ramsay’s ‘snowballing’) to the second highest interest rate debt.
Ask yourself what you want more — feeling good about clearing a tiny debt that might not have been hurting you as much as a huge, behemoth debt with a massive interest rate? Or actually having more money and being debt free sooner because you paid down the highest interest rate debt first, and thus saved yourself the most in interest payments? The advice I have posted above is in nearly every debt management personal finance book I’ve read. That is because mathematically, it’s proven. It will save you the most in interest because you are targeting your repayments to reduce your overall debts in the most efficient way.
Dave Ramsay’s strategy is only published in books by Dave Ramsay, not books on personal finance. Remember, he’s still just a person selling you something. While his strategy might work for people who think they need instant gratification and like to be in denial about exactly how much they are helping themselves, for most people, especially those who are able to delay gratification, (like most adults) there is a much better, cheaper, and faster way.
Get yourself down to a local library, and check out a few books on personal finance. Most of them have some great strategies on getting debt free and living a frugal life. You can do it.
If you’re working, take your lunch to work from home. This is far cheaper than buying your lunch. Most people would save over $1000 a year just doing this.
Buy staple products in generic brands, and buy in bulk. Look for factory sales outlets near where you live, or try to buy wholesale if you can. If you know someone who owns a business and can buy wholesale, then ask them if they will help you buy items in bulk.
Grow your own vegies. It’s pretty easy once you get set up. I do this and I water them out of the shower recess.
Work another job. I do. It’s only a few hours a week, but it’s extra money that goes straight into my home loan. We’ll have our home loan paid off in 5 years, if things continue as they have been.
If you’ve got any savings, put them on your credit cards. In a legitimate emergency, you can always pay for stuff with your credit cards. But it’s stupid to have $1000 in savings earning 3% ($30 per year income) when it could be saving you $150 on a debt with a 15% rate. Worst of all, that $30 income is taxable, so if it’s taxed at 20%, you’re left with $24. You need to make your money work for you, not work for the bank and the tax man.
Best wishes
Comment by Goonhilda — July 13, 2010 @ 12:54 pm