While you can always prevent going into debt in the first place, some situations in life don’t leave us with a second option. As a result, you may end up with unplanned debt, and you may find yourself struggling to pay it off down the road. If you find yourself in a situation where you must get into huge debt to solve your problem, it’s not the end of the world. There are strategies that you can implement to pay down your debt.
Here are some of the most effective strategies that you can use to get out of debt faster.
Debt Consolidation
If you have multiple loans such as student loans or credit cards, or personal debt, you may want to consolidate some combination of your loans so you can make one or fewer payments each month. One of the advantages of debt consolidation is to have one or fewer payments each month which makes your loans easier to manage. The opposite of debt consolidation is that you will have different debt payments coming to you from all directions each month, leading to missed payments, resulting in late fees costing you even more money. Also, you may not have enough money to cover all the different payments every month. Therefore, debt consolidation may serve you better, even though you may wind up with a slightly high-interest rate. When you consolidate your debt from more than one source, you may have extra money left to cover your other life-pressing needs.
Pay More Than Minimums
The first step of paying down your debt is setting minimum monthly payments to avoid forgetting or missing payments on other charges and incur late fees. Also, making minimum payments on your loan on time is critical to keeping your FICO score undamaged and avoiding paying penalties in the process. But it gets even better when you make more extra payments on your loan each month. Some of the immediate benefits of making extra payments on your loan are eliminating your debt faster, saving a lot of money on interest charges, and growing your credit score. By doing this, you will shorten the length of your loan and save a lot of money.
Debt Snowball
In the snowball method, you simply list down your debt from the smallest to the largest, excluding your mortgage. Then you allocate extra payments each month to pay off the smallest debt first while making monthly minimum payments on other debts. If the smaller debt is paid off, the monthly payment amount is rollover to pay down the next debt. The debt snowball is all about creating momentum to eventually pay down all your debt.
However, one of the significant drawbacks of the debt snowball method is that it ignores debt with the highest interest rate because it focuses on paying down the smallest debt first and then the largest debt last. If your larger debt has a high interest rate, you will wind up paying more interest charges.
Debt Avalanche
Debt Avalanche is an accelerated repayment plan to pay off your most expensive debt first. In this method, you first target debts with the highest interest rate and make extra payments while paying minimums for other debts. Once you have paid off the first debt, you move to the next debt with the highest interest rate and repeat the cycle until you pay down all your outstanding debts.
One of the advantages of the debt avalanche method is that it reduces the interest you pay on your debt while marching toward being debt-free. It’s also the fastest way to get out of debt because it reduces the time it takes to pay off your debt.
Debt settlement
Debt settlement is when you negotiate or compromise with the creditor to pay off your debt in one lump sum at a lower amount than your owe. There are few strategies to settle your debt with creditors; you can call the creditor to negotiate with them or pay your debt through a third party but only when you’re already in delinquent. Just make sure you know the ins and outs of debt settlement before you use this debt settlement method.