Most debt, other than your mortgage, has a high interest rate and should therefore be paid as soon as possible. If you have various other debts, you might be in a tough position, using credit cards or other facilities to make ends meet. The first step to get a grip is get a detailed insight in your income and expenses [link]. The next step is lowering your expenses. Any savings you can produce, should go right into paying off your debts.
Research even shows (in the US) that credit card or student debt might cost you a date…
Let’s have look at different types of debt:
- Credit cards in the Netherlands charge at 14% of interest (if purchases are not paid in one installment). In the Netherlands credit cards are not very popular. Just 5% of the Dutch has a credit card debt, while the average in Europe is 18%. In the USA even up till 40%. If you have a credit card debt of EUR 2000,- this means you pay EUR 280,- on interest per year.
- Student loans your country of residence will influence the size of your student loan considerably. In the Netherlands, university education is subsidized, this applies to the tuition fees. Living expenses are increasing. My kids (or rather, me as a parent) will not have the great facilities I had when studying (state provided scholarships). Nowadays students can get a loan for their expenses. The average loan is already around 25K per student in the Netherlands and expected to further increase. Although the interest rate is low (0% at the moment!), the student loans have a big impact on young people, starting a life. First of all, even with a low interest rate, the loan needs to be repaid on a monthly basis. And buying a home in the currently stressed markets is even more unreachable, because the student loan has a negative effect on the maximum mortgage amount. If you have young children like me, it’s best to set aside a student fund, so you children do not have to start life after college with a massive loan.
- Consumption loans: anything from a car loan or other additional loans. If you need a loan to buy a car, then you probably can’t afford it. This pretty much accounts for all other consumption credit as well. Some mail order companies in the Netherlands use the same interest rates as credit cards: 14% (this is the legal maximum interest rate in the Netherlands).
For many debts (even including mortgages), the following quote is very appropriate:
…the cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run.
Not only the interest and replayment cost of every month applies, but how much of your lifetime do you need to pay off the debts? And is this really worth it?
A tip from mrs. Money Samurai (a finance expert):
If you have one or multiple debts and the interest rates are high (e.g. for credit cards, mail order or a general overdraft on a checking account), then refinancing might be a good option for you to lower the payments. Lowering the payments increases you savings rate and therefore makes it possible to pay of the debt quicker! Refinancing works in large cooperations and governments, but can be beneficial for your personal situation as well. Let’s the following example:
A credit card debt of EUR 2000,– and a mail order debt of EUR 2000,-. Makes a total debt of EUR 4000,- on which a 14% interest rate needs to be paid (or EUR 560 per year).
If you can get a personal credit for 5%, or perhaps increase your mortgage (which likely will have an even lower interest rate), the credit card and mail order debt can be paid off, and the interest payment on the personal credit or mortgage increase is EUR 200,- per year: a EUR 360,- saving. If you are a student with a credit card debt, you might want to take out a student loan (normally not recommended if you can avoid it), but he, 0% interest is better then 14%! And allows you to save even more.
Photo by Nick Pampoukidis on Unsplash