Debt Management Tips
Posted on: 17 June 2017
Fig talks to our Head of Underwriting, Josh Velson, to ask him how Fig customers can better manage their debts.
As Data Lead at Fig Loans, I take a detailed look at our customers’ financial statements every day. It’s my responsibility to not only make sure that Fig is able to keep our loans affordable, but also to understand why our customers come to us for help.
One bad debt management habit I see a lot of is people taking out Fig Loans after paying off cheaper forms of credit. By cheaper forms of credit I mean credit cards, mortgage loans and bank personal loans.
Types of Credit:
Many people have access to multiple sources of credit, like credit cards, bank personal loans, mortgage loans, auto loans, and, of course, small dollar loans. These types of credit have different purposes, and more importantly, different costs (interest and fees) and repayment flexibility. In our How to Compare Loans guide, we highlighted cost and repayment flexibility as the two most important factors when comparing two forms of credit.
For example, a payday loan won’t usually give you the ability to make partial payments while a credit card does.
For people with credit scores below 680, the typical interest rate cost for the most common types of credit are listed from cheapest to most expensive below:
Subprime mortgage: 6-9%
Subprime auto loan: 9-12%
Subprime personal loan: 18-36%
Low-Limit Credit Card: 20-25%
Small Dollar Lender: 150-700%
There are times where we’re not able to choose which payments we want to make now and which payments we want to make later, which is what makes debt management so hard. This happens most often when we have to make payments on a not-very-flexible loan while we have other debt payments due. I see this most often when mortgage payments are due because mortages always has a large minimum payment.
However, where you can use debt management tips is when choosing to make payments on existing flexible debt, like credit cards.
The Best Kind of Debt to Roll Over:
Instead of paying off the entire balance, you can choose to roll over (make the minimum required payment) on credit cards. If you can roll over cheaper debt while paying off more expensive debt, you will be much better off than if you pay off all of the cheaper debt and roll over more expensive debt.
Always pay off the most expensive loan you have first.
It might seem obvious, but plenty of people don’t realize that this is the case.
Last week, I found myself looking at a person who applied to Fig for a loan after paying off their whole credit card balance. This person could have saved the entire cost of the Fig loan by just choosing to make the minimum payment on their credit card!
As a rule of thumb, bank personal loans and credit cards will always be cheaper than a small dollar loan. So pay your small dollar loans off first!
I see this all the time, and not just with credit cards. I’ve seen people make early payments on their mortgages and fall short of cash, then apply for a Fig loan. I’ve seen people who don’t pay off their payday loans but buy a car with their tax refund instead of getting an auto loan that would be dozens of times cheaper and easier to pay off!
I hope after reading this you won’t make the same mistake! Fig loans, and all small dollar loans, should be a last resort. Always try to pay off the most expensive debt you have first, and avoid paying off cheaper sources of debt if you’ll need a Fig loan to cover expenses later