I would like to chat about debt in today’s blog, both fixed and revolving debt. This issue is an essential factor in real estate investment due to the amount of debt in the market. Financial institutions are keen to lend, especially to students and young people, with easy access to credit cards and student loans. In my opinion, taking on debt at such a young age is a mistake as it allows people access to money that they cannot repay as they are not earning money. I have a client who has consolidated her debt, bringing her some short-term breathing space, but the debt is still active as she is only topping up on the outstanding amount. She will be back to square one in a few years if she cannot reduce it. She asked me for advice on how to tackle this problem. I identified some issues: one is lack of planning due to lifestyle costs. People will usually turn to credit cards to make up for the shortfall in their disposable income—a nice meal in a restaurant or a weekend away with friends.
It’s essential to establish your lifestyle costs are and stay within that budget. Many self-employed people fall into this trap because their income fluctuates, and they don’t realize they are overspending. Before long, they have run up a substantial credit card bill and find it difficult to repay it. This debt can be either fixed debt, a standard recurring charge like a mortgage, car loan or a personal loan. You know the monthly amount that is required to be paid each month. The term could be over 5, 10 or 25 years, and it’s clear the repayment schedule. You are done after you meet the repayments, and the debt is gone. With revolving debt, on the other hand, most people know where they are, either their credit cards, lines of credits, or home equity lines of credits, which is a HELOC as short. They authorize and approve a limit, but you don’t necessarily have to use all the money at once. Some months you might spend more, others less; you cannot predict what your expenses might be due to unforeseen circumstances connected to revolving debt.
When you repay what you use in one month, it will avoid excessive interest charges. But if you cannot make regular repayments, the interest will compound and accumulate. Another difference between fixed and revolving debt is that you don’t know the amount of interest you need to repay every month; that interest can fluctuate with revolving debt. There is usually a clause in the fine print that the interest can change depending on the prime rate. Some credit card companies inform you upfront of these conditions; others don’t, so you must know the limits and rates that can rise to 24% if not managed prudently.
I have produced a video that sets out the actual costs and how to employ the rule of 72 on debt versus accumulating assets. I would encourage you to watch the video as I do want to go into detail on this blog that we’re not going to go into those specifics here. In some cases, people utilize a fixed loan instead of using a line of credit or credit card. The interest paid on a fixed loan will be less than revolving debt in the long term because the interest is calculated differently. The Interest is calculated upfront on a fixed loan, and you’ll know exactly how much it will cost you. However, the minimum interest you pay can be small with credit card debt, which sucks people into thinking it’s an easy repayment process compared to fixed amount repayments. And I feel this is one reason people get into trouble with credit cards because they know that the minimum payment is not too daunting. However, if you continue to have a balance on a credit card, this will continue to accelerate because the interest rate is not calculated upfront. It is calculated daily according to the balance that you have in there.
In my course, you will learn detailed information on how to calculate repayments and interest rates. I believe it’s essential that you understand the actual costs associated with debt to manage your finances prudently to allow you peace of mind and stay in control of your finances. I know it’s difficult because we are used to having debt as a society, and it’s always not possible to live without it. But we need to try and put a plan in place. I think that’s the prudent solution for most people. In conclusion, we need to understand the type of debt that we’re incurring, especially as real estate investors.
Some investors may want to use their line of credit or their home equity lines to purchase a property. However, as discussed in this blog, this is revolving debt, and it will incur more interest than a fixed loan. I also believe that it’s an excellent option to use your home equity line of credit to buy a property and refurbish it. You can repay that in a short amount of time, but if you’re purchasing a property that is buy and hold, it might be advisable that you convert that home equity line of credit into a fixed rate at some point. That’s all for today, and we will see you soon.
When you repay what you use in one month, it will avoid excessive interest charges. But if you cannot make regular repayments, the interest will compound and accumulate. Another difference between fixed and revolving debt is that you don’t know the amount of interest you need to repay every month; that interest can fluctuate with revolving debt. There is usually a clause in the fine print that the interest can change depending on the prime rate. Some credit card companies inform you upfront of these conditions; others don’t, so you must know the limits and rates that can rise to 24% if not managed prudently.
I have produced a video that sets out the actual costs and how to employ the rule of 72 on debt versus accumulating assets. I would encourage you to watch the video as I do want to go into detail on this blog that we’re not going to go into those specifics here. In some cases, people utilize a fixed loan instead of using a line of credit or credit card. The interest paid on a fixed loan will be less than revolving debt in the long term because the interest is calculated differently. The Interest is calculated upfront on a fixed loan, and you’ll know exactly how much it will cost you. However, the minimum interest you pay can be small with credit card debt, which sucks people into thinking it’s an easy repayment process compared to fixed amount repayments. And I feel this is one reason people get into trouble with credit cards because they know that the minimum payment is not too daunting. However, if you continue to have a balance on a credit card, this will continue to accelerate because the interest rate is not calculated upfront. It is calculated daily according to the balance that you have in there.
In my course, you will learn detailed information on how to calculate repayments and interest rates. I believe it’s essential that you understand the actual costs associated with debt to manage your finances prudently to allow you peace of mind and stay in control of your finances. I know it’s difficult because we are used to having debt as a society, and it’s always not possible to live without it. But we need to try and put a plan in place. I think that’s the prudent solution for most people. In conclusion, we need to understand the type of debt that we’re incurring, especially as real estate investors.
Some investors may want to use their line of credit or their home equity lines to purchase a property. However, as discussed in this blog, this is revolving debt, and it will incur more interest than a fixed loan. I also believe that it’s an excellent option to use your home equity line of credit to buy a property and refurbish it. You can repay that in a short amount of time, but if you’re purchasing a property that is buy and hold, it might be advisable that you convert that home equity line of credit into a fixed rate at some point. That’s all for today, and we will see you soon.
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