While most Americans have debt of one type or another, it’s always good to keep in mind some general rules:
- Use debt only for items that have the potential to increase in value, such as a home, college education or home remodeling. Avoid incurring debt on items like clothing, vacations, or other luxuries.
- Consider a shorter term when applying for loans. Even though your monthly payment will be higher you will incur much less interest over the life of the loan.
- Make as large a down payment on your car or home as you can afford. If you can make prepayments without incurring a penalty, this can also significantly reduce the interest paid.
- Replace high-interest-rate debts with lower rate options. It is typically fairly easy to transfer balances from higher-rate to lower-rate credit cards. Another option is to obtain a home-equity loan to pay off your consumer debt. In many cases, home-equity loan interest rates are lower than other forms of personal loans, and as long as the home-equity loan balance does not exceed $100,000, interest payments are tax deductible.
- Compare loan terms with several lenders, since interest rates can vary significantly. Negotiate with the lender. Although most lenders have official rates for each type of loan, you can often convince them to give you a lower rate if you are a current customer or have outstanding credit. Review all your debt periodically, including mortgage, home equity, auto, and credit card debt, to see if less expensive options are available.
- Review your credit report before applying for a loan. You then have an opportunity to correct any errors that might be on the report.