Coming to Terms With Your Long-Term Debt

By Kelly Kehoe on 10 May 2013 (Updated 19 August 2013) 2 comments

Investopedia.com defines "long-term debt" as loans and financial obligations lasting one year or more. Think home mortgages, student loans, and car loans.

Since the 2008 housing crisis and ensuing recession, many families have taken on greater debt loads to cope with the volatile economy. Some may have lost their long-term debt to foreclosure or personal bankruptcy along the way, while others are still shouldered with debt from supposedly short-term credit card loans, or long-term mortgage, student, and auto loans.

With all the governmental incentives offered to first-time homebuyers and the Federal Reserve keeping interest rates low to promote investment and growth in the economy, perhaps you've taken on more long-term debt in these past few years.

The word "debt" has a negative stigma attached to it, and while most personal finance gurus advocate for debt-free living, having long-term debt isn't always a bad thing, if you can come to terms with it. (See also: Good Debt, Bad Debt)

Assessing the Situation

First step — assess your financial situation.

What is your overall debt load, both short-term and long-term? What loans or payments incur the most interest each month? How are the loans benefiting you (or how did they benefit you originally)?

For example, say you have student loans leftover from your college days. American Student Assistance says that 37 million Americans currently have outstanding student loans totaling nearly $1 trillion. Taking out a student loan and working to pay it off carries a lot of implications (such as higher interest rates), but remember that having a certificate or degree improves your chances of getting hired in a rough job market. Ergo, you may have incurred some long-term debt to receive an education, but rather than chiding yourself for taking on more debt, think of it as a valuable investment to boost your employability. 

And what about credit card debt? A February 2013 Bankrate survey reported that only 55% of Americans have more money in savings than they have in credit card debt. If you have credit card debt, rest assured you're not alone — the average American household has almost $15,800 in debt. Again, think of your debt accumulation as a valuable lesson, rather than focusing solely on the negative aspects, like what you would've done with the money if you weren't too busy making monthly interest payments. 

All of these factors must be considered when tackling your financial situation, regardless of the type of debt involved. Once you account for your debts and the consequences of having these loans, it's time to do something about them.

Taking Action

Where debt is concerned, gloom and doom surrounds us. It seems to have taken permanent residence in American society: media reports about debt, politicians bemoaning the debt woes of the government and the people, and the digits under the "to pay" section of our bills all appear to be multiplying.

But don't despair; prioritizing your debts and paying them off — not randoml, but based on simple principles of finance and psychology — is key to stabilizing your finances.

Prioritize

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When it comes to prioritization, you have a couple of options: either continue paying the minimum balance required every month or funnel more money into your payments in order to pay off the loan quicker. It won't be as simple as paying off a small credit card balance within a few months, so don't get impatient. 

If you have multiple credit cards, determining which one to pay off first presents a unique problem to tackle. Common sense may argue that you should pay off ones with highest interest first, but psychologists argue that it's better to tackle smaller debts first because, in paying those off, it feels like we're making progress — thus, we'll be more likely to continue making debt payments rather than throwing our hands up in frustration. If you have a debt load similar to or greater than the average American household, it will probably take a few years to pay off all your credit cards, but by prioritizing your card payments, you'll be able to pay them off much sooner.

As for mortgages, these are generally paid off in the span of decades, and the timeline for student loans can span between a few months to a lifetime (in extreme scenarios). Payments on interest accrued often outweigh payments on the original, principal amount, but in the case of mortgages, at least there's a tax deduction for interest payments.

To shrink the timeframe for paying off these loans, consider options such as extra payments or refinancing, among others.

Staying Motivated

Paying off long-term debt is quite a journey, but the benefits of owning your own home (or having a car and a good education) don't always mask the potential frustration of shouldering thousands of dollars in debt for a major chunk of your life.

Although it may decrease the number of payments over time, stinginess can prove more of a psychological hindrance than help when you're paying off long-term debts. Celebrate the milestones. Every time you pay off another $5,000 on your student loan or pay off yet another credit card, mark it on your calendar, and don't hesitate to treat yourself and your family to a nice dinner after making significant progress towards your debt-free goals. Always remind yourself why you're doing this — to fulfill your dream of going to college, being able to ditch rental living and own your own home, or take the vacation of a lifetime. Keeping things in perspective and staying organized will help you come to terms with your long-term debt and eventually, pay it off.

Have you come to terms with your long-term debt? What keeps you upbeat despite the burden of repayment? 

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Ugh. Student loans aren't a good thing just because you got a degree. The harsh fact is that nearly half of all students who attempt degrees don't get them, and whether a student loan is an "investment" in your future depends on both the amount of debt and your reasonable expected future earnings given your major.

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Liisa

We have had our ups and downs with debt over the years, always with the long-term goal of being debt-free, and celebrating the milestones is huge. One of our favorite memories ever is taking our best friends out to a nice dinner after I paid off all my college-induced credit cards. We just bought a $35 chair at the thrift store I work at (in great condition!) to celebrate paying our taxes off after a difficult move to another state and paying off two small student loans. Celebrating is so key -- otherwise you go crazy.

We are super motivated to keep knocking them out, and having a little chart on our fridge with our debt balances keeps us focused. I use a green marker to color in the amounts as we pay them... returning the money and the power back to us a little bit at a time! :) It's a journey, but we are going to get there and we are determined to enjoy the little victories and pleasures along the way.