At this point in my life, I’ve had the luxury have gotten a mortgage, student loans and a few car loans. Much of the population can’t do the same for various reasons and that’s why I think it’s a luxury. As the loans added up and life kept happening, the paycheck to paycheck cycle began. Learning about all the options to get out of that cycle made it easier to get a handle on paying them off.
The first big loan I got was for college. I faintly remember being against loans at that age, but not having the money to put down for the semesters quickly made me become a student of the lesson “That’s how everyone does it”. I got both private and federal student loans, graduated, and started paying everything back. Taking the first job offer after school meant a lower than average income for my degree and that kick started my living paycheck to paycheck cycle. I didn’t do my due diligence. It got bad enough that at one time, my federal loans went in deferment. Coming out of the deferment, I saw the monthly payments increase that hit the budget even harder. I doubled down, got a new job and kept on making payments whenever I could.
I don’t spend a lot of time trying to time the market, but bear markets do not last. If at any point, there’s a massive correction, I want to be ready to buy underpriced assets or be financially stable if I suddenly lost a job. Having a loans would not allow that to happen. Not only do my loans take away from my income but also time; The most important assets in life. Feeling like my younger self has robbed certainty from my future self by signing off on all the loans, I started learning about loan refinancing. This is essentially putting a single or multiple loans under a new contract with a new defined interest rate and time to payoff. I figured putting all my student loans together, having a lower monthly payment and less interest would take a load of my finances.
My federal loans had ballooned up to about $375/month and the private ones at about $345, totaling just over $720. While digging in, I calculated an average of about 7% interest on the federal ones and 9% on the private ones. Over time, the private student loans interest went up to 10.5% and that’s when I decided enough was enough. I applied for the refi, got approved and started making my new payments. Going with Earnest as the provider came with payments down to about $330 with a 5.75% interest rate. It extended the life of the loan another 10 years, but I plan on paying it off much sooner than that.
It’s been a few months of making the lesser payments and having a lot more left over at the end of the paycheck has been helpful. I’ve used the remaining as leverage and used it to double down on paying my consumer debt, which are at an average of 23%. The biggest risk is having life happen, and it ends up taking the extra 10 years to pay off the loan. Not only will I need to pay off my consumer debt as soon as possible, I will have to pay off the student loans as soon after so I don’t end up with more interest payments.
Looking ahead, I know it’s important to be ready for the next massive market correction. I know it will end up giving me some worries and I want to minimize that as much as possible. The best leverage in a time like that will be an effective emergency fund. By refinancing, I’ve set the wheels in motion to be ready for any life happenings and I just have to keep executing.
Have you utilized debt refinancing strategies to hedge for the future?