The Most Important Financial Advice You’ll Ever Get

I am a member of several financial forums, where members post financial questions and other members answer them. Sometimes, a question is posed that is good fodder for this weekly article. That was the case last week. A member wrote:

“Hello all. I currently have an unsecured loan of $32,000. I’ve begun to honestly struggle financially with being able to keep up with this hefty payment every month on top of all my expenses. $898 is my minimum payment. I’m literally paying over $500 in interest every single month because paying more than that to avoid the interest is a struggle right now.

I’m trying to figure out what options I might have, if any one has any advice. I’ve gone so far to consider bankruptcy but I also know that probably wouldn’t be a good idea either. Is there a way I could refinance this interest rate of 19.76% currently? I got myself into a really bad situation. I’m 25 years old and I’m trying to do everything I can to see the light here. Any help and advice is greatly appreciated.”

Sadly, this is a common problem. It is one of the worst financial mistakes a young person can make, because it can trigger a lifetime of debt. The best piece of financial advice I can give you is to never, ever get into a situation like this.

A bad deal for the borrower…

The terms of this loan were known up front. With a loan of $32,000 and an interest rate of 19.76%, you are going to initially pay $6,323 a year — $527 a month — for just the interest. It’s a great deal for the lender. But it’s financially disastrous for the borrower.

The post generated more than 200 comments in less than a week. Many were simply trying to cheer the person up, but a number offered specific advice. But this was the most important piece of advice I saw, and the advice I would have given:

“Attack this. Cut out everything you can. Sell unused items. Get a second or third job. Put every penny possible each month on it.”

This is a financial emergency. You have to start making some very difficult financial decisions. It won’t be fun, but you need to cut out every non-essential expense in your budget. No eating out. No Starbucks. No leisure activities that cost money. Cancel memberships. Cut out Netflix.

There is usually a lot of fat in just about everyone’s budget, and in this case this person needs to cut it all out. If you don’t need it to survive, cut it out until this debt has been paid.

In addition, several people recommended trying to do some balance transfers. It’s certainly possible to get a credit card with a zero or low-interest rate for an introductory period. But you must be careful that where the interest rate resets after the initial period. Further, $32,000 is a lot of money to transfer onto credit cards. Unless this person has a great credit history, they are going to have a difficult time shifting this loan onto credit cards.

A number of people also advised against bankruptcy. I agree with that advice. Bankruptcy will follow you around for a long time, and it is a true last measure in my book. You exhaust every other possibility before considering that route.

The good news is that if the person develops the financial discipline to pay off this loan, they have developed the skills to be able to save money. I would certainly suggest that it’s fine to allow some of those non-essentials back into your life once the debt is paid, but leave a little room to start building your wealth. If that turned out to be the net result, then there was a silver lining in this dark cloud.

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