Hi Money Minder,
So, here’s the situation:
We’re talking about around $185k in unsecured debt with an average interest rate of 14%. A mix of personal loans, credit cards, and government student loans.
On the bright side, there’s about $100k in home equity and $30k in liquid assets.
Monthly cash flow is around $8k (assuming no savings), with a total monthly mortgage of $3,500 at 4.25% APR.
- What about using the $30k liquid to pay off the highest interest debt, bringing the average down to 11%? Then, pay off the rest of the debt over 10 years at around $2,500 per month. Yes, it might leave us with no emergency fund or monthly savings, but at least we’ll gain more home equity and maintain our credit score.
- Or, we could consider some kind of debt settlement plan. Stop paying monthly, save up the money, and negotiate a settlement. Sure, it might impact our credit in the short term, but it could be a positive move in the long run.
- Any other ideas?
Looking forward to your advice on this. Thanks!
Cheers,
Response from THE MONEY MINDER:
Hello There,
Sorry to hear about your financial situation. In this scenario, it seems like addressing the $185k unsecured debt with an average interest rate of 14% should be a top priority. It’s great that you have $30k in liquid assets that can be used to pay off the highest interest debt and reduce the average interest rate to 11%. This can save you money in the long run by paying less in interest.
Considering that you have a decent monthly cash flow of $8k (assuming no savings), allocating $2,500 per month towards paying off the remaining debt over 10 years is a practical approach. This allows you to manage your debt while still having some cash flow for other expenses. However, it is important to build up an emergency fund as soon as possible to avoid financial insecurity in case of unexpected expenses.
As for the $100k in home equity, it might be worth considering refinancing your mortgage to take advantage of the equity and possibly lower your monthly mortgage payment. This can free up more cash flow to pay off your debts or build up your savings.
In terms of preserving your credit score, staying current on your payments and managing your debt responsibly is key. While debt settlement may seem like a quick fix, it can have a negative impact on your credit score in the short term. It’s crucial to weigh the pros and cons of each option before making a decision.
Overall, prioritizing your debt repayment, building up your emergency fund, and managing your cash flow effectively are essential steps to take control of your financial situation. It may take time and effort, but with a strategic plan in place, you can work towards financial stability.
Take care and best of luck on your financial journey.
Farewell from THE MONEY MINDER.
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