In most households, it is likely your family carries some form of debt. These debts might be in credit cards, student loans, financed purchases, or a mortgage. While some debt is manageable and good, other debt can have your family deep in the hole struggling to get out. Not having a plan can deter you from getting out of debt and really hamper your opportunity to build household wealth. You should consider the following steps to pay off debt quickly and be careful in what you choose to take a loan out for.
Save a Couple Thousand Dollars in an Emergency Fund
You are probably asking how does saving money get me out of debt? The reality is that the first step is critical towards getting out of it. For most people, they try to get out of debt quickly, when a problem arises in their household. This could be a broken appliance, a leaky roof, or some other circumstance that kills any momentum for getting out of debt. The reality is that having a few grand set aside at all times while you pay down debt is important because it shows you are capable of reducing household expenses and gives you wiggle room to gain momentum in paying down your debts.
How to Get a Hard Money Loan
Once you are debt-free, the question is when you should take out a loan. Generally, the only loans that you should take out are for real estate. In this case, a hard money loan is usually the best way to go. These loans are usually the best because they are backed by collateral, which enables a lending institution to be more willing to lend as they can take your property if you default on the loan.
Start with Smallest Debts and Work Your Way to Bigger Ones
Conventional wisdom would say to pay down the debt with the higher interest rates first, and then pay down small to no interest loans last. While this may be the better idea mathematically speaking, for someone who needs the psychological momentum to pay down massive debt, it is always better to tackle debts smaller to largest. This is something known as the snowball effect. Paying down debt is always a matter of will power versus dollars.
As you start to pay off each of your existing loans, you will feel a sense of accomplishment and will give you the belief that getting out of debt is a doable process. More importantly, once one loan is paid off, it then frees up cash flow to tackle the next loan more aggressively. Obviously, since most loans have minimum payments, you will have to keep making those, but if you can use that extra cash flow to pay down a loan as fast as possible, you will feel real progress moving forward.
Do Your Homework
It is important to always read the fine print of loans as they come with a lot of terms and conditions. Ideally, you may want to minimize interest paid on a loan if you have a lot of cash flow on hand, so make sure there is no prepayment penalty. Also, make sure you understand the interest rate and whether it is fixed or variable. You will want to make sure the loan is from a reputable lender who has a good history of offering quality loans at reasonable interest rates. You will want to make sure you shop around to find a good interest rate as these loans tend to carry higher interest rates.
You will also need to make sure that the property you are asking a lender to invest in has investment potential. A lender could call your notes if the property value goes under or has not realized a return. Showing a lender that you have experience in real estate is important to give them confidence that you know how to invest wisely in properties. You will also want to make sure you have the capital set aside to pay the loan off in a short period of time. Most hard loans have a maturity date of twelve months, so any insolvency on your part could force the lender to take over your property.
Only consider a hard loan if you need a bridge to own real estate. Just make sure your investment goals are financially sound and well cared for.