How to Manage Multiple Sources of Debt

CreditCard_With_MoneyAs young adults struggle to get out from student loan debt, which averages a whopping $26,000 per student, according to The Project on Student Debt, they’re shying away from taking on other forms of debt.

A recent study released by the Federal Reserve Bank of New York found that college graduates are now less likely to take on a mortgage or even an auto loan by the age of 30 — reversing a historic trend of home ownership.

But what do you do if you are already shelling out monthly student loan payments but also want to buy a house or car? Taking on multiple types of debt is a balancing act and it can be easy to get financially overwhelmed.

The first thing you should do when thinking about taking out another loan is to determine your total monthly payments for current outstanding debt and the amount you’re looking to borrow. Then, figure what percentage of your monthly income would go towards paying off that debt.

“We recommend that no more than 30% of your take-home pay go toward housing costs [like a mortgage, taxes, and insurance] and no more than 20% of your pay go toward servicing other debt [such as a car loan or credit cards],” says Gail Cunningham, vice president of membership and public relations for the non-profit National Foundation for Credit Counseling.

Exceed these percentages, and you could find yourself burdened with a crippling amount of debt. “Make sure that the additional debt is absolutely necessary,” Cunningham stresses.

Before taking out a loan, experts suggest having a repayment plan in place.

Everyone’s pay-back strategy is different, so find one that best fits your financial needs and lifestyle to make the plan sustainable.

Some borrowers find that it’s motivating to pay extra toward the smallest loan in order to quickly eliminate it. For example, if you have a car loan that has an outstanding balance of $5,000, and you also owe $27,500 for a student loan, pay extra each month on the auto loan to rid yourself of it as soon as possible.

But if paying the least amount of interest over time is the most important thing, focus on paying off the loan or credit card with the highest interest rate first while meeting the minimum obligations on the others.

If you already have an auto loan or credit cards, before taking on additional debt, you may want to consider refinancing the loan or getting a lower rate credit card by doing a balance transfer. For example, if you took out an auto loan when rates were higher, refinancing it at a lower rate may make sense depending on the balance and time remaining.

Likewise, you can pay down the principle of a higher rate credit card faster if you transfer the balance to a lower interest rate credit card, provided you continue to make the same monthly payment (and it’s more than the minimum due). As an example, a $200 payment on a card with a $50 monthly minimum will reduce principle for a card with 3% interest faster than one with 15% interest. Just be sure to read the fine print regarding the cost to transfer the balance and when the introductory rate will end.

Finally, if you discover yourself getting overwhelmed by the repayment process or find that you can no longer meet your monthly repayment obligations, consider talking with the company or meet with a credit counselor to consolidate debt, reduce interest rates or create a new repayment schedule, or even possibly getting some of your debt forgiven.

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