Lesson 3: Debt Management - Cheat Sheet
Debt Types Comparison
Debt Type | Typical Interest Rate | Priority Level | Characteristics |
Payday loans | 400%+ APR | Highest | Extremely predatory, prioritize immediately |
Credit card debt | 18-25% APR | Very high | Compounds quickly, high minimum payments |
Personal loans | 6-36% APR | High to medium | Fixed payments, fixed term |
Car loans | 4-12% APR | Medium | Secured by vehicle, fixed term |
Student loans | 1.5-12% APR | Medium to low | Often income-based repayment options |
Mortgages | 2-7% APR | Lowest | Longest term, tax advantages, builds equity |
Debt Repayment Methods
Method | How It Works | Best For | Psychological Impact |
Avalanche | Pay highest interest rate debt first | Mathematically optimal, saves most money | Can be discouraging if largest debts have highest rates |
Snowball | Pay smallest balance debt first | Quick wins for motivation | Costs more in interest over time |
Hybrid | Start with snowball, switch to avalanche after momentum | Balance between motivation and math | Good compromise approach |
Debt Consolidation | Combine multiple debts into one | Simplifying multiple payments, potentially lower rates | Requires discipline not to re-accumulate debt |
Interest Savings Calculator
For every £1,000 in debt, here’s how much you save annually by reducing interest: - Reducing from 20% to 15% = £50 saved per year - Reducing from 20% to 10% = £100 saved per year - Reducing from 20% to 0% = £200 saved per year
Debt Payoff Acceleration Strategies
- Bi-weekly payments: Make half your monthly payment every two weeks (26 half-payments = 13 full payments per year)
- Rounding up: Round all payments to next £5 or £10
- Windfall allocation: Dedicate 80-90% of bonuses, tax refunds, and gifts to debt
- Expense audit: Review and reduce monthly bills, applying savings to debt
- Debt snowflakes: Apply small unexpected savings immediately to debt
Creditor Negotiation Script
“Hello, my name is [Name] and I’ve been a customer for [X years/months]. I’ve received offers from other companies for [lower rates/better terms], but I’d prefer to stay with you. I’ve been making regular payments and would like to request a reduction in my interest rate. What can you do to help me with this?”
If unsuccessful: “When would be a better time to call back about this? Is there someone else who might have more authority to help with my request?”
Debt Consolidation Warning Signs
- Extending term length significantly (paying less monthly but much more overall)
- Fees that offset interest savings
- Secured loans that put assets at risk for previously unsecured debt
- Pressure tactics or guarantees that sound too good to be true
- No requirement to close original credit accounts
Debt Collection Rights (UK)
- Collectors cannot harass you, use abusive language, or call at unreasonable hours
- They must validate the debt in writing if you request it
- You can request they stop contacting you (though this doesn’t eliminate the debt)
- Most debts have a limitation period of 6 years (5 in Scotland)
- Always get settlement agreements in writing before making payments