Paying Down Debt
Debt is a reality most people will face at some point in their life. Not all debt is bad, but letting debt carry over month to month or consume your finances can become a huge risk.
Many types of debt are needed to improve your life, move things forward, or even to make a larger income, such as:
- Student loans for higher education
- Buying a home to build equity
- Credit card debt for necessary purchases
- Car loans for purchasing a vehicle
Some of these debts may not be a problem. However, unmanageable debt can quickly take on a life of its own with a "debt snowball" effect. Once it starts as a small debt rolling forward, it just gathers more "snow" and can become a gigantic debt avalanche by the end.
Paying down debt can be a daunting task, and there are no "one-size-fits-all" solutions. Having the right information is an essential first step as you work towards debt repayment.
How To Pay Off Debt
When you are looking to get your finances under control, you must prioritize certain debts above others early in the process.
Differences in interest rates and consequences for default require careful consideration before you start paying. When you can't eliminate debt immediately, your choice of which debts to tackle first can impact how quickly you become debt-free — and how many problems arise in the process.
Here are some tips for paying off your debt:
1. Handle Your Necessities Before Repayment
Borrowers should first ensure that their necessities are covered. Falling behind on mortgage payments, car loans, or utility payments could result in foreclosure of a home, repossession of a car, or having utilities cut off.
Payments toward child support and taxes should also be a serious concern since failure to pay your legal obligations can result in:
- Wage garnishment
- Raised interest rates
- Jail time
2. Use the "Snowball Method" for Debt
If you find yourself in a "debt avalanche," some borrowers find the snowball method an effective way to handle debt payoff. You simply start by paying your smallest debt first. These usually go away quickly, which feels effective and gives you the momentum to keep going.
Usually, this means paying credit card debt first to avoid the late fees. This will also prevent payments on accrued interest that create additional financial strain.
One of the smartest techniques for a repayment plan is to pay off debts with the highest interest rate first. This is similar to the snowball method but takes a different approach — focusing on the largest interest rates instead of the smallest amounts.
3. Consider Debt Consolidation Options
Loan consolidation is another option. Debt consolidation may help you access better interest rates and simplify the administration of debt. You, or a professional company, can start this process. You first need a personal loan and will use it to pay each debt in full. Once these are paid off, you no longer have to keep track of multiple lenders, due dates, interest rates, and communications.
This is common practice with student loans. If you are considering consolidating your student loans into one, do your research to see which lender's offer is the best for your situation.
4. Refinancing Your Debt
Refinancing is one way to manage debt. It can help a homeowner take advantage of lower interest rates or improved credit scores.
But while refinancing can help resolve financial problems, it can also cause more problems. Consider the pros and cons before you take this step.
Options When You Can't Pay Down Debt
You can also:
- Get credit counseling
- Try debt negotiation programs
- Ask for debt settlement
- Seek a debt discharge with Chapter 7 bankruptcy
- Use a repayment plan with Chapter 13 bankruptcy
Remember, you have rights against harassment from debt collectors, and it is easy to fall prey to debt scams. A bankruptcy attorney is often the best person to step in if you face harassment or lawsuits from creditors or don't know where to turn for serious debt help.