Living without loans: how to get out of debt step by step
In this article, we want to show you what to do when you have accumulated so many loans that it seems that you will work 24 hours a day, just to pay off debts. We will talk about how to get out of credit card debts, what to do if we have personal loans or have made money loans outside the financial system, when is a good time to consolidate, to refinance and how to break the financing cycle in which we can be locked up
Before starting, it is essential to clarify that there is no single way to get out of debt such as payday loan debt. Everything will start from understanding precisely what your level of indebtedness is, what type of loans you have at this time, what are your conditions and, from this analysis, make the decisions that allow you to leave the dependence on credit to generate savings and increase your heritage.
There are many ways to understand what a problem is; However, the first step to your solution will always be to define it.
When we think of how can I get out of debt? We usually do it based on the urgency of everyday life, the dissatisfaction caused by the feeling that we are working only to cover the loan installments, or the anguish of living Thinking what juggling we will do to meet the credit card payment this month. If we want to live without loans, the first thing we have to do is have the most comprehensive and brightest possible picture of our financial situation to give it the urgency and importance that this requires.
Doing so can be uncomfortable and generate fear and anxiety because it involves facing the outcome of many decisions we have made in the past consciously or unconsciously. However, it will be a meeting that is necessary to have if our deepest desire is to generate a real change in the way in which we are managing our money and fulfilling our deepest goals.
Not all loans have the same impact on our finances. First, because a consumer credit (credit card, free investment, liberty) is not comparable with a credit that was used for the purchase of long-term assets (mortgage or vehicle, for example), or against a free credit. Second, because there are credits with much higher fees than others. Third, because they have different interest rates and annual costs, among others. Finally, because the habits that each one of us has in front of debt end up conditioning their impact on our economy.
Hence, it is essential to the table that we have completed in step 01 and then compares this table against our budget and our assets to understand if, on the broader picture of our financial situation, we are facing a solvency or liquidity problem.
When we talk about solvency, we mean the ability we have to fulfill our obligations based on the things we have. In other words, what we want to know is if the total value of our assets (all the things we have) would be enough to cover our debts.
Whenever the total of our assets is higher than the whole of our debts, we will say that we have solvency or that we are solvent. On the other hand, when the value of our assets is lower than the total of our debts, we will say that we have no solvency or that we are insolvent.
solvency in loans
Whenever the whole of our assets is higher than the sum of our debts, we will say that we have stability or that we are solvent. On the other hand, when the value of our assets is lower than the total of our debts, we will say that we have no solvency or that we are insolvent.
To evaluate our solvency level, it is enough to add the value that we believe in the market would pay for all our goods (real estate, appliances, furniture, and fixtures, etc.) and compare it against the total balance of our loans.
We may not have enough solvency if much of our credit is in consumer debt. However, if we have enough liquidity, it is possible to design a solid strategy to live without loans.
On the other hand, if we do not have enough solvency and we also have a severe liquidity problem, we may have to resort to more radical solutions (reparation or insolvency law) to solve our debt problems.
In finance, when we talk about liquidity, we refer to having enough cash to be able to meet the payments and obligations that we have to make on a day-to-day basis.
Assessing our liquidity level is very simple. For this, it is enough to compare the total value we pay monthly for credit installments against our net income and our expenses. Unless we are very moderate in spending, it is possible that by dividing the total payments to episodes by the total of our net income, a result is a number higher than 0.3 (or 30%) we are facing liquidity problems.
A liquidity problem is identified because we have a month left at the end of the salary. In other words, we lack money to meet all the installments of our loans and all the expenses of our home.
The first two steps focus on understanding how you are in the present in terms of debts and how they are affecting your finances. The next step is to choose a set of actions that you will take to reduce your current debt level in the shortest possible time.
Get out of debt with the snowball method
It is one of the most popular ways to eliminate your debts. It consists of organizing them depending on the total balance you owe in each one: from the smallest to the largest and paying them in that order.
To do this, you need to have enough space in your budget monthly to usually pay the fees of all your obligations and extra space to pay an additional value to the smaller credit.
This action will make you finish paying the lowest loan in less time than it would usually take if you continued to cover the minimum payment. At that time, you will allocate not only the extra amount but also the fee you used to pay to the smaller credit to the next debt in size.
Once again, you will see that the other debt in size you will finish paying in a shorter time than it would have taken if you continued paying the normless installments of that credit. At that time, you will begin paying the third loan, and, in addition to the minimum payment, you will pay the total you paid monthly to get out of the previous loan.
As you can see, it is called a snowball because once you defined how much you are going to pay monthly to your debts, you will continue paying that same amount as you go out of them and that will allow you that every time you leave a loan you allocate a more significant fee to pay it.
Refinance to give oxygen to your cash flow
If you don’t have enough cash every month to start a snowball and your loan installments are making money barely enough to cover your obligations, creating a recast can be a good alternative.
Contrary to the snowball method, you will see that in the options that follow from here, you must negotiate directly with the entities or people to whom you owe money or with third parties that help you solve your debt problem.
A necessary refinancing, in the form of a recast, is to ask the financial institution to take the total balance of your loan today and divide it again into several installments (12, 24, 36, for example) so that may reduce the monthly payment you pay for that obligation.
Like any of all these options, it is an alternative with its advantages and disadvantages. The main advantage of redefining an obligation is that by lowering the size of the fee, you will have more cash left over at the end of the month. With this surplus cash, you could start a snowball, or make sure you have enough money to fulfill all your obligations. The main disadvantage of this option is that it is a temporary solution that if you do not know how to take advantage of it, it can continue to worsen your financial situation.