How to pay off all your loans — including your mortgage — quickly and easily

You may not realise you have a problem...

Most people borrow money but fail to think of themselves as being in debt.

The fact is:

  • You don’t have to be in any sort of financial difficulty to be in debt.
  • When you add up the cost of servicing your debt – including your mortgage – it may come to more than you imagine.
  • Debt is the single greatest threat to your financial freedom and security. It is sucking away your most valuable asset: Your income.
  • The first benefit of being debt-free is that your money becomes your own to spend or invest as you prefer.
  • Not having any debt will make you less vulnerable. You won’t need so much insurance, for instance.

Debt comes in many guises...

How to pay off all your loans — including your mortgage — quickly and easily

The trouble with the word “debt” is that it has all sorts of negative connotations. Many people believe that providing they are never behind on their repayments they are not in debt. This isn’t true. A debt is when you owe someone money. It could be:

  • An unpaid balance on a credit card
  • An overdraft
  • A personal loan
  • A car loan or loan for some other specific purchase
  • A mortgage on your home
  • A secured loan
  • A hire-purchase agreement
  • An unpaid balance on a store charge card
  • A business loan
  • A loan made by a friend or family member.

It is important to remember that just because you are never in arrears and have an excellent credit rating, it doesn’t mean you are debt free.

Take stock of your situation

How to pay off all your loans — including your mortgage — quickly and easily

Once you have stopped making the situation any worse, you need to take stock of your situation. In particular, you want to gather together full details of your debts. The information you require about each of your debts is:

  • To whom you owe the money
  • How big the debt is
  • How long you have to pay it back (the term), if relevant
  • What the rate of interest is and whether it is fixed or variable
  • Whether you will be penalised for paying back the debt early (and if so what the penalties are)
  • What the minimum monthly payment is (if this is relevant)
  • Whether the interest is calculated daily, monthly or annually.

Obviously, it is important not to overlook any possible debts, so here is a quick checklist to remind you. Don’t forget to include any money that your spouse or partner may owe, too!

  • Mortgages
  • Secured loans
  • Credit cards
  • Store cards
  • Overdrafts
  • Personal loans
  • Car loans
  • Hire or lease purchase
  • Catalogue company loans
  • Family or friends who may have lent you money
  • Student loans.

Most of the information you need should be supplied to you each month by your lenders. However, if it isn’t, then you should telephone or write to them asking for full details.

How lenders will try and trick you

How to pay off all your loans — including your mortgage — quickly and easily

With so much profit at stake lenders put a lot of effort into persuading consumers to borrow. There is a catch to every offer! Let me give you just one example:

Josephine goes to buy a new bed in the local store sale. It is marked down from €1,300 to €1,100 and as she goes to pay the shop assistant persuades her to take out a store card as it will give her an extra 10% saving. So instead of €1,100 she pays just €990.

However, Josephine doesn’t pay off her store card at the end of the month but instead takes 36 months to do so. The result? Because she is being charged 15% interest, the bed ends up costing her €1,548. Not so much of a saving, after all!

A couple of other things to watch out for. Firstly, loan consolidation. When used properly – as I will explain in a moment – loan consolidation can be an excellent way to speed yourself out of debt.

However, unscrupulous lenders often lure borrowers into taking out expensive consolidation loans — even encouraging them to borrow extra for a holiday or other luxury item. Secondly, if transferring credit card debt to save money, only too often a low interest or zero interest period is followed by a much higher rate. Check the conditions carefully and don’t be taken in by lenders.

Debt threatens your future freedom

How to pay off all your loans — including your mortgage — quickly and easily

I certainly wouldn’t go so far as to say all debt is bad.

There are plenty of instances where borrowing money makes financial sense — in order to buy your own home, for example, or to pay for education.

It is when you are borrowing money to finance your lifestyle that you are getting into dangerous territory.

Living beyond your means threatens your future financial freedom.

For example: Cathal is the manager of a supermarket and earns a good income.

However, it isn’t enough to cover all the things he and his family like to enjoy, so he borrows frequently. In a typical year, he might borrow to pay for Christmas presents, a holiday, or just to cover other shortfalls in his monthly expenditure such as clothes or eating out.

He views this as “short-term” debt, but the reality is that every year between the ages of 35 and 55, he borrows an average of €4,000 more than he earns.

Because this is short-term, unsecured debt he pays an average of 12% a year in interest. His monthly debt repayments (excluding his mortgage) are €360.

Cathal’s brother, Ray, is also a supermarket manager and earns exactly the same income.

However, he lives within his means. He doesn’t eat out as often, go on holiday as frequently, or drive such a nice car. He saves the €360 his brother spends each month on servicing his debts and instead invests the money.

He manages a return of 6% a year on average between the ages of 35-55, and so builds up a tax-free lump sum of €160,000.

Your most valuable asset is your income, and there is only so much that each of us will ever earn during our lifetimes.

By spending a large portion of it on servicing debt, you are, basically, giving it away to your lenders.

Surely your need is greater than theirs?

The Money Doctor action plan:

  • If you only take action on one aspect of your finances make it your priority to get yourself out of debt.
  • The first step is to stop borrowing and to get a realistic position of what you owe and how much it is costing you.
  • Consider consolidating your debt in with your mortgage, if you can.
  • Remember, if you save money or have any spare cash, you should put it towards paying off your debts, providing you still maintain a Rainy Day Fund or Emergency Fund.
  • Pay your most expensive debts off first.

The art of debt elimination

How to pay off all your loans — including your mortgage — quickly and easily

You’ve taken the decision not to incur any extra debt. You’ve got a real grip on the size and nature of your problem. What next? You have two options: the consolidation approach or sniper approach.

The idea behind consolidation is to reduce the cost of your debt dramatically. Instead of having lots of different loans — all at different rates — you have a single loan at a much lower rate. It works particularly well if you own your own home. What you do is:

  • Add up all the money you currently spend making your debt repayments;
  • Consolidate all your debts into a single, much cheaper loan;
  • Keep on making the same monthly payments.

Example: I have listed all the debts that Brian and Sheila have along with the interest rate they are paying on each one:

Type of debt

Monthly cost

Interest rate %

Mortgage

€900

5.5

Home improvement loan

€16

10

Credit card 1

€45

16

Credit card 2

€30

16

Store card

€71

17

Car loan

€225

10

The total amount Brian and Sheila are spending on their debts is €1,287 a month. Since they own their own home, they may be able to consolidate all their debts in with their mortgage. At the moment their mortgage is for €128,000 and has 19 years to run. Although consolidating their loans increases their mortgage to €152,000, by continuing to pay €1,300 a month they can shorten the length of their mortgage to just 14 years, also saving themselves €27,000 in interest.

Debt consolidation is a once-in-a-lifetime course of action. It only works to your advantage if you carry on making the same monthly payments, otherwise all you are doing is spreading the cost of your short-term debt over the longer term.

Currently it is virtually impossible to obtain such a consolidation loan in Ireland. I would strongly advise using professional help.

The sniper approach: If you don’t own your own home — or if you don’t have sufficient capital tied up in your property to consolidate your debts in with your mortgage —you’ll need to take the sniper approach. This involves picking off your debts starting with the most expensive. What you do is:

  • Find some extra money. Just because you don’t have a mortgage doesn’t mean that you can’t consolidate your debt. Move your borrowing to where it is costing you the least;
  • Use the money you are saving each month to pay off your most expensive debt — the one with the highest rate of interest.

If you sometimes pay more than the minimum amount required each month then make sure you pay it to debts costing you the most. You may find one or more of your existing lenders will be open to negotiation.

To use a typical example, imagine that Neil has the following debts:

Type of debt

Monthly/minimum cost

Interest rate %

Credit card €4,000

€60

16

Store card €5,000

€75

17

Car loan €8,000

€258

10

Every month he usually pays about €100 more off one or other of the debts — on a purely random basis. Also, he is able to find €100 from other sources to help speed himself out of debt.

In other words, Neil has €200 extra to apply to getting himself out of debt. Therefore, what he needs to do is pay off his most expensive debt first — his store card. By paying an extra €200 a month he can do this within 20 months. This frees up the store card minimum payment of €75 to help pay off his next most expensive debt — which is his credit card.

The first steps to getting out of debt

How to pay off all your loans — including your mortgage — quickly and easily

There is one thing you must do before you set out to eradicate all your debt: STOP BORROWING.

After all, you can’t get yourself out of a hole if you keep digging. Take a once-and-for-all decision to:

  • Not just to pay off your debts, but to stay out of debt;
  • Not borrow any more money unless it is absolutely unavoidable (or there is a very reasonable chance that you can invest the money you borrow to make more than the loan is going to cost you to repay);
  • Not live beyond your means;
  • Avoid “bargains”. In my book a genuine bargain is something you need to buy but which you manage to get at a lower price than you expected to pay for it. Something that you don’t need but you buy because it seems to be cheap is definitely not a bargain.

There are various actions you can take to make this easier on yourself. You can:

  • Cut up all your credit cards and store cards;
  • Cancel your overdraft limit. But remember, most banks will allow a ‘shadow’ overdraft on your account. This means that informally they may allow your account to be overdrawn by say €500 before you are contacted. This is costly and may eventually have to be formalised, so you are back in the overdraft trap again. Keep track of all transactions on your account;
  • Use a charge card where the balance has to be paid in full at the end of each month or take the prepaid card option;
  • Avoid buying any unnecessary items;
  • Do not take out any new loans, including hire-purchase agreements and overdrafts;
  • Do not increase the size of any existing loans;
  • Pay with cash whenever possible (nothing reduces one’s tendency to spend money as paying with cash).

American money expert Alvin Hall (you may have seen him on television) suggests that anyone with trouble curbing his or her expenditure should keep what he calls a money diary.

The basic idea is that you carry a small notebook with you wherever you go and write down details of every single cent you spend. You should include everything — from your daily newspaper to your mortgage repayments. After a couple of weeks you’ll have a precise picture of where your money is going and this, in turn, will help you avoid spending money on things you don’t really want or need.

If you are prone to impulse spending — or if you always spend more than your income — I can see the good sense in this approach.

You can also download the free Money Doctor app that will track your spending. Simply type ‘Money Doctor’ into iTunes or Google Play to download.

Seven great reasons to get debt free

How to pay off all your loans — including your mortgage — quickly and easily

Seven reasons to pay off all your debts — including, perhaps, your mortgage.

1 It will make you less vulnerable. If you are in debt and for some reason your income is reduced or stops altogether (for instance, if you fall seriously ill and don’t have permanent health insurance), then not being able to repay your loans could have serious consequences.

2 To make your family less vulnerable. When you die your debts won’t die with you — your estate will have to pay them all.

3 To stop inflation worries. If you owe money and interest rates rise (1981 interest rates were as high as 20%) you could easily find yourself struggling to make your monthly payments.

4 You won’t have the stress which comes with debt. Owing money is stressful.

5 You’ll enjoy a genuine sense of satisfaction. There is a real peace of mind which comes with not owing money and with owning your home outright.

6 It will open up new choices. Suddenly all the money you are spending on servicing your debts will be available.

7 It will ensure you have a comfortable retirement and may allow you to retire early. Why should you have to wait until you are 60 or 65 to give up work?

Beware compounding your debt woes

How to pay off all your loans — including your mortgage — quickly and easily

It is compound interest that makes debt so expensive: When you are earning it, it has the power to make you very rich. When you are paying it, it has the power to make you very poor.

Albert Einstein described it as “the greatest mathematical discovery of all time”. It is the reason why banks, building societies, credit card companies, and other financial institutions make so much profit from lending money. And it is the reason why ordinary investors can make themselves rich simply by doing nothing.

It is a fiendishly simple concept called compound interest. Perhaps the easiest way to understand compound interest is to look at two hypothetical examples:

Imagine that you borrow €1,000 at a rate of 10% a year. At the end of one year — assuming you have made no repayments — you will owe €100 in interest (10% of €1,000) or a total of €1,100.

If you wait another year then you will owe an additional €110 in interest (10% of €1,100) or a total of €1,210. In other words you are paying interest on the interest.

Now imagine that you have €1,000 to invest and you deposit it in a savings account, which pays interest at a rate of 10% per year. At the end of one year you will be entitled to €100 interest.

If you withdraw this interest but leave your capital, at the end of the second year you will be entitled to another €100 interest.

Supposing, however, that you don’t withdraw the interest but leave it to “compound”. At the end of your first year your €1,000 is worth €1,100. At the end of your second year you will have earned €110 interest, meaning that your original €1,000 is worth €1,210. Put another way, your interest is earning you more interest.

When you borrow money, compound interest is working against you.

Supposing, for instance, you borrow €5,000 on a credit card at an interest rate of 15% — which isn’t high by today’s standards. The credit card company allows you to make a minimum payment of 1.5% each month.

After two years you will still owe approximately €4,700, having made repayments of €1,750, of which €1,450 has been swallowed up in interest.

Compound interest is your greatest enemy and your greatest ally.

When you are in debt, it works against you. But when you have money to invest you can make compound interest really work for you.

“Compounding is man’s greatest invention as it allows the reliable systematic accumulation of wealth.”

— Albert Einstein

Borrowing: The biggest threat to your financial wellbeing

How to pay off all your loans — including your mortgage — quickly and easily

The greatest threat to your financial wellbeing is borrowing.

I am not talking about reckless borrowing, either, but ordinary debt borrowing in the form of personal loans, overdrafts and credit cards. This is because the cost of borrowing money is a huge drain on your most valuable asset — your income.

What’s more, the cost of borrowing can’t just be measured in terms of the interest you are paying. You must also factor in the opportunity cost — the money you would otherwise be making if you were investing your income instead of spending it on servicing your debts.

Let me give you one simple example: €10,000 repaid over seven years at an interest rate of 10% will require monthly repayments of €166. Total interest cost €3,945.

Invest €166 a month into — say — the stock market for the same period and assuming the same sort of growth as we have seen over the last 10 years bar the last few — you’ll have a lump sum of almost €20,000 in seven years.

Which is why, I explain here the benefits of being debt-free, together with two proven methods to make paying off all your loans fast and painless.

The Money Doctor 2016 is published by Gill Books and available now, priced at €12.99. Find out more at www.moneydoctor.ie


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