Why is getting rid of unnecessary debt important? Simple, useless debt is a drag on our personal finances, increasing our expenses with high interest expenses. Not only is the debt painful to the pocket, it is stressful to the mind and body as well. Speak to anybody under mounting credit card debts; you will know they are really stressed by trying to make payments.
Every useless debt we pick up takes us further and further away from our goals, instead of getting Passive Income, we are getting Passive Expense instead! Debt management is a really large topic in itself and I will not attempt to address every single aspect in this Five Steps Financial Freedom series, I will however try to cover the main points.
Let’s look at some of the main culprits.
Loan shark Debt/ Unlicensed Moneylender / Black market Moneylender
This is the worst scenario one can be in. Loan sharks/ unlicensed money lenders whatever you call it do not play by the rules. They often make the borrowing really easy but make paying it off extremely difficult. Interest rates of such debt are known to hit over 100 percent interest per month! Once you get in, it is very tough to get out. Worse still, they will make your life hell by harassing you and your family constantly. Never ever step into this category.
Licensed Moneylender Debt
This debt is only slightly better than the previous. However, the interest rates are also extremely high, as high as 200% a year. The good news is that they are regulated by the government; the bad news is that many of them still employ harassment tactics used by the loan sharks. For more information, read Staying Away From High Interest Rate Money Lenders. Again, stay away from these sources no matter what.
Credit Card Debt
Most young people are guilty of carrying credit card debt balances and rolling them over month after month just by paying the minimum charges. Many also do transfer balance from an existing card to a new card at lower interest rates, which is supposed to be good, but they end up charging their previously paid credit card to the max again. With a credit card limit of up to 2-3x the salary of an individual, it’s easy to see how people can end up owing lots of money with couple of maxed out credit cards.
Banks are also extremely cunning in that they allow you to pay a minimum of say $50 per month, but they will charge you up to 24% interest on your remaining balance! How often does one make investments which can yield over 20% per year?
Personal Loan / Credit Line
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