Getting Started with Velocity Banking
Introduction
I have come across this new approach of eliminating your debt faster and more efficiently reading about financial web articles and found it very educational to share with you, my readers. If you desire to break free from debt, you’re not alone. Many financial literacies unknowledgeable individuals seek effective debt repayment strategies to quickly steer them toward financial freedom. Velocity Banking has gained recognition for its effectiveness among the many available methods. By creating a budget, identifying debts, and making lump-sum payments, you can save money on interest and get out of debt sooner than most programs, such as debt consolidations.
Understanding Debt
Before diving into Velocity Banking, let’s first understand the basics of debt. Each time you borrow money, you’re incurring debt. This borrowed amount accrues interest over time, increasing the sum you need to repay. If managed correctly, debt can snowball into a manageable burden.
Traditional Debt Repayment Strategies
Debt Snowball and the Debt Avalanche methods are the two most common strategies to tackle debt.
The Debt Snowball Method: It is crucial to know that this method involves paying off debts from smallest to most significant, regardless of interest rates. You first focus on the smallest debt while making minimum payments on others. Once paid off, you move on to the next smallest debt. This strategy provides psychological wins that can motivate you to continue.
The Debt Avalanche Method involves paying off debts with the highest interest rate first, regardless of the debt amount. This mathematically efficient method saves you the most money on interest over time.
What is Velocity Banking?
Velocity Banking is a method that utilizes both a Home Equity Line of Credit (HELOC) or Line of Credit (LOC) to pay off your mortgage or other debts faster.
A HELOC is a home equity line of credit. It defines as a revolving line of credit that your home can secure. If you default on your HELOC, the Bank can foreclose on your home. HELOCs generally carry variable interest rates, indicating that the interest rate can increase or decrease over time. Now let’s see what LOC is about. Typically, A LOC is a line of credit. It is not secured by your home, meaning the Bank cannot foreclose on your home if you default on your LOC. LOCs typically have fixed interest rates.
It involves using your income to pay down the line of credit and then utilizing the available credit to pay off debt. This method helps save money on interest and, ultimately, helps get out of debt faster.
Step 1: Creating a Budget
The first step towards getting started with Velocity Banking is creating a budget. Identify all your income sources and list all your expenses. We recommend including everything, from your mortgage and utility bills to groceries and entertainment. The goal here is to have a clear picture of your cash flow.
Step 2: Identifying Debts
Once you have a clear picture of your finances, it’s time to identify your debts. List all your debts, from credit cards and student loans to your mortgage. Remember to note the amount owed, the interest rate, and the minimum monthly payment for each.
Step 3: Opening a Line of Credit
We recommend that individuals struggling with debt and owning a home open a Home Equity Line of Credit (HELOC) or a personal Line of Credit (LOC) as a first step. These credit lines typically have lower interest rates than most debts, which makes them ideal for the Velocity Banking strategy.
An example: Nate decides to apply at his local Bank for HELOC. He has a single-family house worth 350,000 dollars and a mortgage balance of $210,000; his home has grown an equity of 140,000 dollars. Nate has many choices. He can utilize this home equity to obtain a HELOC or LOC.
Nate decides to get a HELOC. The Bank approves Nate for a HELOC with a credit limit of $60,000. The interest rate on his HELOC is variable and is currently 3.5%. Nate can now borrow money from his HELOC and pay it back anytime. He can also use his HELOC to make home improvements in his house, consolidate his debt, or pay for unexpected expenses.
In this scenario, we must understand that regardless of the amount of money Nate can get from a HELOC or LOC, it will depend on Nate’s home equity and credit score. The interest rate on his HELOC or LOC will rely on his credit score and the current market conditions.
Step 4: Making Lump-sum Payments
Here’s where Velocity Banking differs from traditional methods. Instead of paying off your smallest debt first (Debt Snowball) or your highest-interest debt first (Debt Avalanche), you’ll make a lump-sum payment towards your debt using the line of credit. This technique drastically reduces the principal amount owed on your debt, saving you significant money on interest.
Example:
Unfortunately, Katina, a Chef who loves cooking for people and enjoys living in Karmasville, had $20,000 in credit card debt and an 18% interest rate. She is seeking a solution; she learned thru her search to eliminate her debt about Velocity Banking. From there, she decides to open a Line of Credit (LOC) with a 6% interest rate at her lovely Bank.
Somehow, instead of Katina splitting her extra $500 per month across her debts, She utilizes the method of Velocity Banking. She took $5000 from her LOC and paid it towards her credit card debt, reducing it to $15,000.
By doing this, she was now incurring a lower interest rate on that $5000 debt, saving her money. Katina then quickly used her income to repay the $5000 on her LOC and repeated the process until she paid off her total debt. This strategy is the power of Velocity Banking and making lump-sum payments using a line of credit.
Step 5: Paying off Your Line of Credit
After making the lump-sum payment towards your debt:
- Use all your income to pay off your line of credit as quickly as possible.
- While doing this, minimize your expenses and use your credit line to cover necessary costs.
- Once your line of credit is paid off, repeat the process, and voila, you are financially unrestrained.
Conclusion
While this process might seem complex initially, with patience and discipline practices, Velocity Banking is a great tool, and it can help individuals pay off their debt quickly and save money on interest over time. Like all debt repayment strategies, it’s essential to carefully analyze your financial situation and consult a financial advisor to determine if this method suits you.
Velocity Banking can be an effective tool to help you get out of debt, transforming your financial health and allowing you to build a robust financial future. Understanding this method is the first step towards making significant strides on your journey to financial freedom.
We can make this journey of a thousand miles just by starting to make a single step. Lets us proceed with our beginning step toward a debt-free future today. With a strong willingness, please take these steps boldly and confidently.
Disclaimer: This post provides general information and discussions about finance and related subjects. The content in this blog post is not intended as, and should not be understood or construed as, financial advice. You should consult a financial professional to discuss your situation before engaging in any financial strategy.
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