Avoid Debt Reduction Gimmicks and Just Pay Off Your Debts

It is important that folks who want to eliminate their debt to not fall for gimmicks.  It's easy to fall prey to consolidation products that show you how you can pay off your debt, including your home, faster and for less.  While they may look good, they often can end up costing you more, and deny you the victories you need to keep pressing on.  Let me explain.

I met with a client who was looking at a consolidation loan from Primerica, a subsidiary of Citigroup.  While the family does have a number of debts, the offer from Primerica was troublesome to me.  The Primerica product showed how all of the debts, including the mortgage could be rolled into one loan.  This loan would be a simple interest loan, the borrowers would only have one payment, and they would save money every month.

But the numbers showed a different story.  The interest rate of the loan was almost 1% higher than the highest rate on any of their credit cards.  Also, the actual savings wasn't nearly as good as originally forecast.  This was likely due to an inflated minimum payments.  Finally, a simple interest loan will cost you more in the long run unless you systematically pay early every month.

My recommendation to the client is to organize their debts smallest balance to largest, and start putting extra payments to the smallest debt first, then “snowball” to the next debt, until all non-mortgage debt is paid off.  By doing so, they will be debt-free except for their mortgage within 30 months.  The other advantage of paying off debt this way is that they will experience the thrill of victory every time they eliminate a debt.  This will encourage them to keep on the path to financial freedom.