Debt - RightCapital Help Center

Explore Debt Management in RightCapital

RightCapital enables advisors to capture every element of a client's financial landscape — even nebulous elements like debt management. This article is designed to provide an overview of the debt management tool in the "..." More Menu > Debt tab. (To review entering liabilities into a client's profile, click this link.)

Debt Overview

RightCapital advisors can easily demonstrate the value of eliminating debt in a financial plan using specific debt reduction strategies. Before implementing these strategies advisors can view all the necessary information regarding account balances, minimum payments, and annual percentage rate (APR). This allows the adviser to view all debts in one location and determine the best approach for each client's needs.

Debt management plays a key role in holistic financial planning. Some types of borrowing are necessary and bring value to the client's life with assets that appreciate over time. Other forms of debt are a burden within financial plans since they don't produce additional net worth or income.

Debt is commonly evaluated by a client's debt-to-income ratio. Lenders use the ratio to evaluate a client's ability to pay back a loan. This measure takes recurring monthly debts and divides that number by gross monthly income. Typically lenders will not make loans to clients with a debt-to-income ratio of over 43%. While a ratio under 36% is seen as optimal, with no more than 28% going toward the mortgage payment.

Strategy Tab

The Strategy tab evaluates clients' debt and looks at different approaches to getting that debt paid off.

Debt Reduction Strategies

Common debt reduction methods prioritize debt payments using a "snowball" or "avalanche" technique which can be modeled in the Debt Management tool. In each strategy, the minimum payments are met but the total monthly debt payments do not decrease as the debt is paid off. Instead, as each liability is eliminated, the previous payment gets rolled into the next prioritized debt. RightCapital allows users to choose from the following strategies:

Highest to Lowest Interest Rate

Prioritizing debt payments from the highest to the lowest interest rate is known as the "debt avalanche" strategy. This saves money on interest payments by quickly paying down the principal balance on high-interest debt. This method reduces the interest accruing on debts which can heavily impact total costs.

Lowest to Highest Balance

Prioritizing debt payments from lowest to highest balance is known as the "debt snowball strategy". This strategy allows clients to gain momentum by paying off multiple debts in a short period of time. Although this strategy saves less on interest when compared to the "debt avalanche" method, it can offer encouragement for clients who are overwhelmed with multiple debt payments.

Refinancing

Borrowers can seek to refinance their debt in order to make favorable changes in their credit agreements. In this scenario, the original contract is replaced with new terms that offer updated payment schedules, lower interest rates, and reduced monthly payments. Typically borrowers will refinance mortgages, car loans, or student loans as interest rates fall in response to changing economic conditions.

Please note:

Adjusted rate mortgages, Interest only mortgages, Home equity lines of credit, and Reverse mortgages are not included in the proposed payment strategies due to the complex calculations involved.

Payment Tab

The Payment tab shows, based on the changes made on the Strategy tab, the updated payment amount for the next month. This screen also displays an overview of loans, balances, interest rates, etc. Proposed debt payments for the next month can be sorted by amount, interest rate, or debt balance by clicking the column header.

Details Tab

The Details tab displays detailed loan schedules for each loan. Use the drop-down box to select different loans. Use the radio button to switch between an annual summary and the monthly loan schedule.

How Debt impacts a client's Plan

See how the Debt Strategy impacts the client’s overall plan and cash flows by navigating to Retirement > Analysis and selecting Debt Proposal under the Debt Strategy drop-down in Action Items.

Principle Only Payments in RightCapital

Outside of the Debt Management planning module, advisors can illustrate the benefits of principal-only payments being applied to a client's loan by using the "Extra Debt Payment" expense. Within the Profile > Expenses tab, an 'Extra Debt Payment' card can be added if there is a loan or credit card added to the plan. The one-time or recurring payments will be used to pay down the principal portion of the applicable loan.

Interaction with Student Loans

Student loans will display on the Debt screen. If the payment plan is Standard in the Loan Card, the loan will fully participate in the Debt tool. However, if they are set up under an income-driven repayment plan (IBR, PAYE, REPAYE), they will not be included in the strategies available under the Debt tool (but will still display on the Debt screen).

In addition, no changes to the Student Loan planning module will impact what is reflected on the Debt screen or vice versa.