Are you one of the 70% of Brazilians who have a current loan and no longer know how to permanently eliminate debt? Debt can be a serious problem and bring a lot of headache to a person’s life. For this reason, in order to start putting the financial life in order, it is common to resort to a debt repayment loan.
However, there are several factors that need to be evaluated before deciding to borrow money; after all, getting a loan to repay another is nonetheless a liability as well, isn’t it?
In this article, we’ll talk about ways to intelligently eliminate debt and restore the balance of finances. Read on and learn how to operate in blue!
How to avoid debt?
Before considering alternatives to solving the problems posed by the accumulated debt – and understanding if it is worth borrowing to repay – you have to think about the reasons that led to that situation. Thus, you can prevent your financial life from reaching this point again.
The best way in this case is financial planning that can organize all monthly income and expenses. From this, issues such as unnecessary exits become clearer, which end up unbalancing the accounts at the end of the month.
It is important to highlight that even those who have already analyzed and decided on the loan to pay off debts must plan.
In this context, the payment of the remaining debts should be organized and priority given to those with higher interest rates, as they contribute significantly to the rapid increase in the amount due.
How can you eliminate debt?
The only way out of debt is to radically change your spending habits and build a new paradigm in your relationship with money. This requires some essential actions. Check out!
Systematize your income and expenses
The first step is to put in a financial control spreadsheet all your income and expenses, highlighting which debts are overdue and ranking them according to interest rate.
Separate debts according to their relevance
Starting from your income limitation, you will need to realign your expenses, promoting a massive elimination of expenses. To do this, group your spending into 3 categories: essential, useful, and unnecessary by placing colors on each segment.
From this view, temporarily relinquish unnecessary expenses (happy hours, for example) and at least 40% of useful expenses (such as a gym and premium cable TV plan).
All necessary expenses signaling the possibility of renegotiation must be subject to a new agreement. The path of understanding how to eliminate debt goes through this awareness.
Create savings goals
The budget surplus arising from the above realignment should be directed to amortizing your debts. Accordingly, annual financial targets must be set for the purpose of periodically reducing the outstanding balance.
Swap more expensive debt for cheaper debt
If there are more interesting opportunities in the market, port your debt or borrow cheaper to pay higher interest rates.
With a scenario of overdraft with annual interest of 306.9% pa and revolving credit card at 307.2% pa, it is more interesting to those who got around with these loans get a credit in the CDC model or, better yet, a payroll – which, depending on your profile, may be less than 30% pa
How should I negotiate debts?
There is no magic formula for renegotiating your debts and concluding if it is worth taking a loan to pay off debts. However, experts offer some recommendations, which not all defaulters are aware of.
Know the rights of the indebted consumer
In the age of digital banking, a major trend is the absence of a contract. But without it, the debtor cannot know the impact of the arrears on his debt.
Charges, interest and penalties also often do not come to the consumer’s attention when crediting by phone or internet.
But how to eliminate debt without knowing the details of what you owe? Well, that is why financial institutions are required by law to provide the contract in credit operations, being fine set by the court in case of default.
In addition, there are other indebted consumer rights, such as the ones you give below:
- The consumer cannot be exposed to ridicule or subjected to any kind of embarrassment or threat (article 42 of the Consumer Protection Code);
- Consumers have the right to access all information regarding their consumer behavior, both in the company and in credit protection agencies;
- Credit restrictions on databases (such as Serasa and SPC) cannot last for more than 5 years (Article 43, §1 CDC);
- Credit protection agencies must notify the debtor before proceeding with its denial (STJ Precedent 359);
- Billing calls are prohibited outside business hours.
Join debt renegotiation effort
Financial institutions have traditionally offered generous discounts on debt renegotiation efforts – rebates can be as high as 95%.
Another advantage of these “clean name” events is the presence of credit recovery professionals with expertise that favors dialogue with borrowers.
Seek help from Procon’s Super Debt Support Program
Did you know you can get expert (and free) advice to clear your name? The Procon of several states maintains a core service and advice to defaulting.
The program includes analysis of each borrower’s economic condition, online finance course, help with home budget spreadsheet organization, strategy formulation and even call for conciliation hearing with creditors. This makes it easier to understand how to eliminate debt, right?
Never negotiate or confess debt over the phone
Negotiating telephone debts risks falling for specialized gang scams, especially when providing personal data. So forget about this channel.
Another important point is that you need to be aware that many collection offices “force” the debtor to confess debts in order to use the recordings as a justification for inflating higher interest contracts. Caution!
Go to the negotiating table with a rational proposal
It is no use sitting down to negotiate without first thinking of a proposal that meets your needs. In addition, being suddenly and abruptly confronted by institutions can make you make the wrong decisions.
Then come to the negotiating table with a redesign of installments that fit your pocket and interest rates that will not make your debt impossible to repay.
If you find it worthwhile to take out a debt loan, use the amount as bargaining power with the managers of the old debt banks. Do not waste this opportunity.
Do not ask bank manager for advice
No matter how well-intentioned your manager is, you must remember that he is primarily in the bank’s interests. The manager is not a personal finance consultant, and letting you negotiate your debts can complicate matters further.
Is it worth taking a loan to pay off debt?
Do a quick Google search and you will see a lot of people asking if it is worth taking a loan to pay off debt. It turns out that this question has no definitive answer, as it will depend on the profile of the indebted.
Replacing financing can be an advantageous alternative, as we said, for cases where accrued accounts have very high interest rates – such as a credit card.
It is also possible to borrow and repay a debt for which a negotiation attempt has already been made, but it was not possible to reach a win-win agreement. The same is true for those who need to clear the name quickly to approve financing or make purchases at the trade.
Before opting for the formal loan at a financial institution, however, it is advisable to look for other options. An alternative is to consult a family member or close friend who may be able to offer the amount with lower interest (or even no interest).
Ideally, you should add up all the debts and request an amount that is sufficient to repay them, meaning that you will be replacing multiple accounts with payment of the loan installment. This is the way for those who do not know how to eliminate debt once and for all.
When is it worth getting a loan?
Our first example of a loan situation is when a person needs to pay off a purchase of $ 50,000.
By using the credit card, she opts for installments of $ 2,000. This amount is in line with your income, however, with the Total Effective Cost (CET) of 600% per annum.
In practice, this means that at the end of a year the consumer will have a much larger debt than initially assumed:
- initial debt amount: R $ 50,000;
- debt value after one year: R $ 336,000.
As the CET of loans generally ranges from 60% to 100%, it is best to take out a loan, pay off the value of the card that would be traded, and benefit from lower interest rates. Look:
- initial debt amount: R $ 50,000;
- debt value after one year: R $ 76,800 (with 60% CET per year) or R $ 96,000 (with 100% CET per year).
See how eliminating debt involves strategy? In the above context, the obvious conclusion is that it is worth borrowing to pay off debt. You can do this kind of simulation on the Protest credit card debt calculator, for example.
Another example involves credit portability – which is viable when the individual has more than one loan and wants to sum them all into one debt. Let’s say this person has two credits at different institutions, with CET at 60% and 70%, respectively.
In this case, it is recommended to contact the institutions and negotiate the transfer of credit of 70% to the institution with 60% rate. You can also look for another institution that has a more favorable CET.
What precautions are required when taking out a debt repayment loan?
Before deciding whether to borrow to repay your debts, you need to pay attention to some key issues, which we’ll cover below!
Charges and interest rates
There is no way to safely eliminate debt without even knowing the basics of financial math. This is because one has to assess whether the interest rates and charges on the loan make the business advantageous or not.
Therefore, all conditions must be carefully analyzed in order to prevent this new expenditure from disrupting your future budget.
It makes no sense to swap the accumulated debt for a new one if the new payment is too high and out of your capacity to meet this commitment.
Therefore, look for a portion that fits your budget, as you must bear this monthly flow until you can pay off the debt. Ideally, your value should not exceed 30% of your earnings.
Watch out for scams
Be careful not to fall into traps! The desperation to get money for debt repayment can cause people to fall for scams to get credit quickly, easily and without consultation with the credit bureau.
If the loan is really necessary, it is correct to look for serious and credible financial institutions, including checking your registration with the Central Bank of Brazil.
Another important tip on how to eliminate debts wisely is to read the contract carefully and be aware of all the information specified in it.
What alternatives can be considered before a loan?
In addition to cutting superfluous spending and borrowing money from friends and family, there are other ways you can consider before taking a loan:
- temporarily adopt a source of extra income to increase revenues;
- sell goods, such as cars and real estate, that can help pay off debt;
- refinance the amounts due;
- use the financial reserve, if any, as savings and savings.
How to save more your money?
You already understand that you need to get out of the vicious circle of debt, but you still have to wonder how to save money every month in the face of so many unforeseen events.
Once you have learned to systematize your income and expenses, have savings targets, and have already traded your most expensive financing for cheaper financing, you need to know what to do to make your savings pay off the most.
There is no single possible strategy for saving successfully. There are, in fact, a set of financial organization actions that must be taken simultaneously, such as exchanging department stores for thrift stores or using discount coupons at leisure.
You can also make automatic investments or even set up a (free) digital bank account to quickly “get rid” of that portion of the salary that should go to financial investments.
What are the best options for saving money?
Better than discussing whether a loan is worth repaying is not going into debt at all. And that can only be achieved through a culture of investing by learning to see how much compound interest can be used for you – not against you, as in financing.
If you already understand how to eliminate debt and are already a step ahead, focusing on financial investments, you should be aware that savings should be viewed with many caveats, as your compensation structure is made so that your income is always low.
In 2015, for example, the profitability of the book, excluding inflation, was 2.28%… negative! In 2018, considering gross profitability of 4.62% per year and inflation of 3.75%, those who left money on savings once again had a near zero return.
Anyone who wants to get out of debt once and for all at a stage of wealth accumulation must therefore abandon savings and set up a long-term investment portfolio with a higher percentage of fixed income assets.
For the future, it is essential to have a private pension plan and, therefore, no longer depend on the social security to have quality of life in retirement.
At under $ 50 / month, you can also have redeemable life insurance that protects your family and also serves as a financial reserve in times of tightness.
There are still other options that can make up your portfolio. Real estate funds for periodic income generation or LCI (Real Estate Letters of Credit) and LCA (Agribusiness Letters of Credit) are good options – and still exempt from Income Tax.
Understand now how to eliminate debt? Regardless of which path you choose, the main point is to be realistic about your financial situation and especially to adopt efficient and cost-effective financial planning. Only then will it be possible to have a healthy and balanced financial life.
And speaking of financial education, how about starting a process of changing your relationship with money today? Download Mongeral Aegon’s personal budget spreadsheet now and learn how to control your expenses!