5 Reasons You Should Pay Down Debt in 2018

In 2011, I financed a new car. And just recently I received the title in the mail and a notification that it’s been paid off — which feels pretty good if I do say so myself.

But why did I get a loan for my car in the first place? The answer: cheap money.

The interest rate for my auto loan was 1.90% APR. So instead of paying off the loan early, I put money into my retirement account.

Looking ahead toward the next time I buy a car, though, I expect the story to change.

The Federal Reserve raised interest rates three times in 2017 — and policymakers aren’t done yet. In fact, members of the Federal Reserve have signaled that there will be more rate hikes in 2018. If you have debt, these rate hikes will impact you. Here’s why you should make 2018 the year you pay down your debt:

1. Interest rate increase = more expensive debt

The biggest reason to tackle your debt is the expense. Paying interest doesn’t provide you with anything meaningful in the long run — other than the privilege of borrowing.

For the last few years, debt has been relatively cheap. That’s made it attractive to use financing for purchases. However, things are changing as the economy continues to pick up steam and the Federal Reserve adopts a more hawkish stance.

While a quarter-point increase in interest rate may not seem dramatic, the effect will add up over time — especially during a tightening cycle that involves multiple rate hikes in the coming year. One interest rate in 2016 was estimated to cost credit card users around $1.4 billion in additional finance charges, according to a WalletHub study. If you have credit card debt, you want to tackle that as quickly as possible — before rates head higher and you end up paying more.

Also, review all of your debt, from your credit cards to your student loans, to figure out what’s going to be most expensive to pay off. Now is the time to create a plan to pay down debt. And consider refinancing your debt to a lower fixed rate so you can avoid interest rate adjustments in the future.

It’s not impossible for a series of rate hikes over the next couple of years to send interest rates higher, back to where they were before the 2008 crisis. That kind of move could make a huge difference.

For example, if you have a credit card balance of $7,000 with a 15.99% APR. According to Student Loan Hero’s prepayment calculator, it will cost you $2,490 in interest and take 48 months to pay off if with a monthly payment of $200.

5 Reasons You Should Pay Down Debt in 2018

If the rate rises to 19.99% APR, it will take 53 months to pay off the same debt and will cost $3,590 in interest. That’s more than $1,000 in interest alone due to a difference in interest rates.

2. Reduce your finance-related stress

Don’t just pay down your debt this year to get in front of an interest-rate increase (although that’s a great reason). You should also pay down your debt for your health.

Debt raises your stress level, which can negatively impact your physical and emotional health. Worrying about money can cause heart problems, increase your anxiety, and result in a number of other ailments.

In 2014, a Finnish study found “serious health effects related to indebtedness,” while a survey late last year by Student Loan Hero found that 67 percent of student loan borrowers had physical symptoms connected to their financial stress.

If you want to reduce your stress level and increase your health, work toward getting rid of some of your debt. Just making a debt reduction plan and starting to implement it can go a long way toward helping you feel better about your financial situation.

3. Improve your relationships

Are you in a romantic partnership with someone? If so, your debt could be causing trouble for your relationship.

Fights over money can strain your relationship and increase the chance of divorce or breakup. A study headed up by Utah State University professor Jeffrey Dew found that marital satisfaction drops as consumer debt increases.

The stress that comes from being in debt probably doesn’t just affect your romantic relationship, either. Feelings of anxiety and stress are likely to carry over into your interactions with friends and family members, including your children.

Pay down debt in 2018, and watch your relationships improve.

4. Free up more money to invest

You need to invest in your future. Seriously.

Put more money toward retirement and other goals. Instead of paying interest, you can earn it. Carrying debt reduces your ability to put your money to work for you.

Once you’ve paid off your debt, you can start putting more money into goals that help you enrich your life and prepare for the future. This doesn’t just include retirement. Consider how much you could put toward other savings goals, like travel, or even continuing your education.

Don’t keep lining someone else’s pockets. Start paying down debt in 2018, and work toward the goal of lining your own pockets instead.

5. Prepare for an economic downturn

Even though ongoing interest rate increases are supposed to indicate economic strength, you still need to prepare for future problems.

In fact, markets and economies are cyclical. This means that, at some point, there’s going to be an economic downturn. It might come sooner than expected, depending on how members of Congress and other policymakers carry out President Trump’s agenda.

Many people worry about how a president can impact their finances, and it’s something to consider, whether you think our leaders are doing a good job or a rotten one.

Having a high level of expensive debt isn’t good for you, no matter the circumstances. But things get worse if you’re in the middle of an economic downturn. When the economy goes south, you don’t want a bunch of obligations hanging over your head.

If you want to protect your finances, no matter who’s in charge or what’s happening with the economy, the first step is reducing your debt.

The fewer things you have to worry about, the better off you’ll be. And that’s reason enough to pay down debt this year.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal LoansFixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 4.98% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 21, 2017 and are subject to change without notice. Not all rates and amounts available in all states. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 4.98% APR assumes current 1-month LIBOR rate of 1.34% plus 3.89% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
4.98% - 14.24%1$5,000 - $100,000
Check rate nowon SLH's secure site
8.00% - 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.