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. And 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 recently announced an interest rate increase. And there are predictions that another rate hike is in the works for 2017. That means debt is about to become a lot more expensive.
So if you’re carrying around some debt, here’s why you should consider making 2017 the year to pay it all down.
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 and easy. 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.
The latest Fed interest rate increase is expected to hit consumers where it hurts, costing around $1.4 billion in additional credit card finance charges, according to a recent WalletHub study. So if you have credit card debt, keep an eye out for higher interest rates.
Also, review all of your debt, from your credit cards to 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.
For example, let’s say you have a credit card balance of $7,000 and 15.99% APR. According to Credit Karma’s debt repayment calculator, it will cost you $2,490 in interest and take 48 months to pay off if with a monthly payment of $200.
And if the rate is 19.99% APR, it takes 53 months to pay off the same debt and costs $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 save money after an interest rate increase (although that’s a great reason). You should also pay down your debt for your health.
In 2014, Finnish researchers published the results of their overview of 33 peer-reviewed studies related to health and finances. What they found is that there are “serious health effects related to indebtedness.”
Debt ups 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.
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 relationship could be in trouble thanks to your debt.
Fights over money can strain your relationship and increase the chance of divorce. 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 other family members, friends, and your children.
Pay down debt in 2017, 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 have 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 or even a continuing education.
Don’t keep lining someone else’s pockets. Start paying down debt in 2017 and work toward the goal of lining your own pockets instead.
5. Prepare for an economic downturn
Even though an interest rate increase is supposed to be a sign of economic strength, you still need to prepared 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 the current Congress carries out the agenda of our new president.
Having a high level of expensive debt isn’t good for you no matter the circumstances. But things get worse when you’re in the middle of an economic downturn. When things go south with the economy, 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.
No matter the situation, 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||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000||Visit Upstart|
|5.29% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|5.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|
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