When you take on debt—whether it’s a student loan, mortgage, car loan, or credit card balance—you’re nearly always paying interest. This is a charge you pay the lender for the opportunity to borrow money. But interest rates aren’t all created equal.
In some cases, you could find yourself stuck with high interest debt, which can add up faster than you may realize. If you happen to be stuck with some high interest debt, don’t despair. The worst thing you can do is ignore the situation and fail to make payments. Recognizing that your rates may be higher than average puts you in a position to take action.
You may have some options for lowering your interest rates and getting your payments under control. Depending on the type of debt, that could mean considering consolidating your debt, or perhaps even taking out a personal loan. Here’s what you can do if you’re struggling with high-interest debt:
Identifying Your High Interest Rate Debt
The first step to tackling high interest debt is figuring out if you have it. Try inputting every debt you have into a spreadsheet. In the first column, enter the current amount you owe on each debt. In the next column, write down what your APR is for each debt. Then, sort your debts from the one with the highest interest rate to the one with the lowest interest rate.
How High-Interest Debt Can Dent Your Finances
High interest rates can sneak up on you. You may have taken out a loan without paying close attention to the fine print. You may have signed up for a credit card with a 0% introductory interest rate, only to have the rate shoot up after the introductory period. Or you may have opted for a loan with a variable interest rate, which often starts out relatively low but can increase dramatically over time.
High interest debt can seriously hurt your finances. By sucking up any extra cash and increasing your debt-to-income ratio, it can potentially prevent you from achieving certain life goals such as buying a home, saving for retirement, or traveling. If your payments become unmanageable, you may risk going into default, which could set you up for a hit to your credit score or even bankruptcy and garnished wages.
Options for Handling High Interest Rates
Depending on the type of loan you have, here are some options for tackling those high interest rates:
Whether you have federal or private student loans, you can often get a much better interest rate if you refinance. This is especially true if you have a good credit score and solid income. Refinancing means consolidating all your student debt—both private and/or federal—into a new loan with a (hopefully lower) interest rate through a private lender. Keep in mind that refinancing with a private lender means you won’t be eligible for federal loan perks like deferment, forbearance, or income-based repayment plans.
Credit cards usually have the highest interest rates of all unsecured debt types. If you’re stuck with a high balance on a credit card, you may want to consider taking out a personal loan to pay it off. If you have an excellent credit score and steady employment, you might qualify for a low-rate personal loan. Make sure you choose a lender that doesn’t charge origination fees or prepayment penalties to avoid extra charges.
If average interest rates have fallen since you took out your mortgage, it may behoove you to look into refinancing your mortgage. If you’re eligible for mortgage refinance, you may be able to lower your interest rate or pay off your mortgage faster. Don’t forget to shop around to make sure you’re getting the best rate and considering lenders with cash-out refinancing options.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
Notice: 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. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.