Investing in Philippines: Ways to be debt free: How to get out of debt fast

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Monday, August 8, 2011

Ways to be debt free: How to get out of debt fast

source: http://harmonizingstatements.com




The fastest way to get out of debt is get a loan on another bank and pay your loan on the other bank or lending institution.

Just kidding! Actually that is the fastest way to be buried in debt and that is one of the sign of one's credit addiction.


source:http://www.ehow.com


So how does one get out of debt fast? Its a question worth a billion dollars. There are so many ways but here is what I know, read and learned.

There are two components to get out of debt fast:

One is to pay the debt with the onerous terms first.
Second is pay more on the onerous debt that will take lesser number of payments to zero out.

So simple right? Lets take it one of the time.

What is "ONEROUS"?


source: http://ravenesquetarot.com


Onerous as define by Cambridge Dictionaries Online is "difficult to do or needing a lot of effort" in other words "burdensome". A debt or loan is burdensome if it charges a higher interest. So for example 
a credit card debt which charges an interest of 1.5% per month is onerous than a loan in a bank that charges 8%. Why is that so? Do remember that the word "interest" in the banking system signify a rate that is for a year thus the terminology "per annum" which is Latin for "per year or annually".

Thus the actual rate on the credit card is 18% per annum. Why do credit card companies state there rate per month? Because it is more attractive than stating it per annum, now you know. 

But the onerous classification should not end in the interest rate. What if you owe only 10,000 pesos in your credit card but you owe 500,000 in your bank loan? See the big difference if you calculate the actual interest. The point of paying debt that are more onerous than the rest is to avoid paying more interest.

Now why do we have to pay more on an onerous debt with a lesser number of payments first? Again the purpose of this is to avoid interest. 

If you pay a debt with a onerous debt with a lesser number of payments more you are actually shortening the number of payments. When a debt requires a lesser number of payments it means you are paying bigger amount per period on such debt. 


When you pay more on such debt or loan the principal where interest is base on becomes smaller each time payment is made thus the interest you will pay will shrink as you pay it. When the principal shrinks in that manner it means your debt balance is dwindling faster and it is there that you save on interest and quickly pay your debt.





If you noticed Debt 2 which originally needs a payment of 2,000 pesos for 25 installments will be fully paid in only 9 installments while Debt 3 which originally needs 33 installments of 3,000 pesos is now fully paid in 16 installments. 


That is what you call getting out of debt fast.







2 comments:

Anonymous said...

Your point is valueble for me. Thanks!

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Louis said...

Thanks! Do you have any other idea on how to get out of debt fast? Please share it here.

Chitika