How To Make Debt Work For You In 2022

By: Rising Capital0 comments

As we settle into the new year, now is an excellent time to take a moment to consolidate your financial goals for the 2022 years.

You can do many things to improve your financial outlook in the short and long term, but none is more important than addressing your debt.

In an ideal world, we would all buy what we need and want with the cash in our pockets. However, there are instances where it is essential to access a credit facility to purchase large assets, such as a new home or car.

What is important to remember is that not all debt is equal. When you are considering taking out a loan, there are several factors that you should consider, such as:

๐Ÿ‘‰ Is the loan secured or unsecured?

๐Ÿ‘‰ What is the interest rate?

๐Ÿ‘‰ What are the payment terms, and will you be penalized if you can pay the loan off sooner than the contract stipulates?

When you take a loan from the bank to purchase a large asset that will accrue in value, such as a home, you actually may end up making a profit off the loan. If you buy a home, you may find that the property value increases faster than the interest you were charged on the loan. This is a smart way to use debt.

However, credit facilities can become problematic if you use credit to pay for your day-to-day expenses because you are spending more than you earn. The problem with this is that you will end up paying much more for the goods and services you are buying. The goods and services will not increase in value, and you will still have to pay the interest on your credit, which means that you are making a loss.

When you use credit in this way, itโ€™s easy to find yourself in over your head with debt, but not so easy to get yourself out.

How to make smart choices about debt

Even a small loan can leave you in a debt trap. This happens when you take a loan, but you cannot cover your repayments because your income does not increase in line with your expenses. The only solution available to many people is to take another loan to cover the first loan payments. You can see how this situation can quickly snowball into financial distress.

How to avoid a debt trap:

  • Pay off your outstanding credit card balance every month
  • Never take on more debt than you can comfortably service
  • Avoid taking out multiple credit facilities
  • Plan for large purchases, save up, and pay cash rather than purchasing on terms

If you have a structured settlement or annuity, you have the option to exchange your structured settlement payments for a lump sum to cover your outstanding debt. You could save a significant amount of money in future interest charges and retain a good credit record by paying off debt that is not serving you.

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