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.
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!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|5.99% – 24.99%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|