Managing Debt Payments

Managing debt payments requires a borrower to control those factors that determine the amount of a loan including down payment, interest rates and the terms and conditions of the loan. Being able to manage debt payments helps a borrower avoid loan defaults and stay out of financial distress.

Determine Debt Leverage Ratio

In order to manage your debt properly, you should assess what your current debt load is relative to your income and net worth. Adding up all of your debt payments, including vehicle, home and personal loans and dividing that amount into your net worth will give you your debt leverage ratio.  If the number is 1 or less, you are in a good financial position.  A debt ratio of 1-1/2 to 2 or higher is a signal of financial difficulty or possible bankruptcy.  

If this is the case, steps should be taken to immediately restructure your debt by paying down or off whatever debt can be dealt with immediately and restructuring or refinancing other debt in order to lower your interest payments.

Making Larger Down Payments

Debt can be managed effectively by lowering the amount of a loan needed to finance such purchases as a home or a car.  This can be done by making as large a down payment as possible toward the purchase. A down payment of 20 percent or more will lower your monthly payment amount and make your debt easier to manage.

As an example, a vehicle that has a cost of $25,000 would have a monthly payment of $417 for a 60-month (5 years) loan, not including fees, taxes and interest.  Putting a 20 percent down payment of $5,000 toward the purchase price reduces the financed amount to $20,000 and the monthly payment to $333 for the same 60-month period.  This reduces the debt by $83 or nearly $1,000 a year or $5,000 through the end of the loan period.

Changing the Length of the Loan

You can set the loan period to lower or raise your monthly payment amount by lengthening the loan period or shortening it.  The longer the loan period, the more costly the total amount of the loan since there is a greater risk of default that will result in a higher interest rate being charged by the lender.  The trade-off is that the actual monthly payments will be lower to reflect the longer payback period.

A 36-month personal loan of $10,000 would result in monthly principal payments of $278 (again not including interest).  The same amount financed over 48 months results in a lower monthly principal payment of $70 less or $208, although the interest rate for the additional 12 months of payments will be 1 or 2 points higher.  This will still result in a lower actual monthly payment, which may be important to borrowers looking to lower their monthly amount.