25 Apr Using Your Line of Credit to Eliminate Student Loans – Part 2
In my last post, if you were a student with a $32,845 student loan, I provided a solution enabling you to pay it off in just under five years while still savings $200 each month. You wouldn’t need to touch your savings. By the time the loan is paid in full, you would have a savings balance of $24,982. Here’s CashMap’s Line of Credit solution. You will save $6725 in loan interest and in fifteen years you’ll save $224,212. What’s the secret? First, let’s review your profile.
A College Graduate’s Profile
You are paid on the fifth and the twentieth each month. After your deductions for your 401K or RRSP (Canadians), medical insurance and taxes, you deposit $1,425 in your bank account. Your expenses total $2,394 each month leaving you with $452 in positive cash flow. You have $48,290 in student loans with interest rates ranging between 3.4 to 6.8 percent interest. Your monthly loan payments total $538.53 over ten years. Your largest loan is $32,842 with an interest rate of 6.8 percent. You’ve managed to save about $5,500. This is almost two months living expenses. You’ve gotten a $4,000 unsecured line of credit at 7 percent.
Use a Line of Credit to Create Your Solution
Your immediate reaction is, “Why and how would I use a line of credit?” For consumers, this is an unusual solution; however, for large businesses and banks this is a strategy they routinely use. So, if they do it, why can’t we? Banks shift their income to a line of credit to create low interest loans that they use to make money in a variety of ways.
Instead of keeping your income sitting in a checking account doing nothing, why not use their strategy to your advantage. At the end of the first year of your solution, you’ll pay just $43.05 in interest and save $4,541 in loan interest over the life of your loan. This is a phenomenal return on your investment. The best part is you have total control!
Your Line of Credit Works Like Your Checking Account
Other than two small modifications, your line of credit works the same way you use your checking account. Because a line of credit is debt, the bank will never pay you interest. Instead, they will be calculating the interest you owe them. This means your goal is to keep your balance as low as possible all month long. Second, the bank calls a deposit a loan payment. To put your money to work, every time you are paid, you are going shift all of your income to your line of credit. You will think of this as a deposit; however, the bank calls it a loan payment.
To help you visualize the solution, use the link to the example ‘Use Your Line of Credit and Create Your Own Scenario’.
In my next post, I’ll show you how to owe the bank a minimal amount of interest. We’ll review how to keep your line of credit balance low all month long.
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