Debts are one of the easiest ways to turn life into living hell. Chances are, if you are reading this article, you are worrying about how to pay your way out of debts.
Here are 5 tips to navigate you through the process of getting out of debt.
1. Identify and Sort Out Your Financial Facts
The only way to start paying off debt is to face the reason why you are in debt in the very first place head-on. Stay on top of your financial situation by assessing the actual numbers. Despite how daunting and terrifying this may sound, having an understanding of your debt situation is essential for developing a debt management plan that actually works.
It could be as simple as compiling a spreadsheet, checking your credit report or talking to the debt collectors to understand the exact amount you owe.
Also, get clarity on what you own - any savings, insurance plans or investments? Perhaps you could cash in some assets to turn around your debts.
2. Work Out a Budget
The next step of repaying the loans is to gather up all your financial statements. Bank statements, mortgage or loan agreements, salary slips, credit card bills, utility bills, shopping mall receipts - dig as deep as you can for any money coming in and out.
Then create a list of monthly expenses - the truly necessary, cannot-live-without ones - and compare the list with your average monthly income. Expenses can be categorised into fixed (like a student loan) and variable ones (with an amount that changes from time to time, such as groceries). If your income type is relatively unstable, pick the income amount to your lowest-earning month in the past year as a baseline.
Only with a complete overview of your routine spending and earnings can you find the leak that causes debts or rooms for adjustments. Consider trimming your variable spending first. You may further look into expanding your income sources or shaving a few hundred dollars off your fixed expenses if the debt situation has been significant.
3. Find Your Loan Repaying Strategy
Before going into credit help, two strategies are often recommended by financial experts:
Debt Snowballing: This is a method of prioritising your smallest debt. Imagine a snowball rolling off a mountain. It starts small but ends up growing into a bigger one. Simply put, you pay off the minimum balance of every debt you own, except for the smallest. You then pay as much as you can for that particular debt.
In theory, this motivates you with the visualisation of debts disappearing. It gives a sense of achievement with small victories and encourages continuous debt paying.
Debt Avalanche: Opposite to Snowballing, Debt Avalanche indicates a method that first repays the loan with the highest interest rate. Mathematically, this method is incredibly cost-effective by saving on interests, which happens to be the major reason why debt situations escalated so quickly.
4. Debt Forgiveness Does Exist
As suggested literally, Debt Forgiveness happens when a lender agrees to wipe away all or partial amounts that you owe. The terms are subject to the debt collectors and debtor through negotiation. Believe it or not, you are then only required to pay for the amount both parties agreed on. Of all types of debts, government-sponsored loans like student loans are the potential ones that come with Debt Forgiveness schemes. With COVID-19 sharply curtailing the world’s economies, more public aid programs and emergency debt relief plans are also available.
While it is always worthwhile to check all your options, note that Debt Forgiveness plans almost always come with major strings attached and huge consequences reflected on your credit score or tax record. You have to be extremely careful about the details to avoid the catch. Keep your eyes open for all the specific parameters that you have to meet to be qualified as well.
5. Look into Debt Relief Options
If you find yourself struggling to keep up with debt payments, consider setting up a Debt Management Plan that allows you to pay off debts at an affordable rate. Most of the time, you could seek help from an individual Debt Management Plan provider or counselling agency to negotiate with your debt collectors. All you have to do is settle a monthly payment to the agency.
Be mindful of the fact that this method is only for repaying unsecured, non-priority debts, including things like credit card debts or personal loans. Fixed loans like those for cars and house mortgages are not covered.
An alternative option for you as a borrower is to obtain a Debt Consolidation loan. Combine all debts into one loan to avoid high-interest rates and additional hidden charges. This type of debt refinancing makes paying off debts easier with a longer repayment schedule or more favourable payment terms.
With all the liabilities grouped and simplified into one loan, it saves the hassle of keeping track of multiple payment details. This is often a good place to start, especially for those who have difficulty managing debts of different sizes. It also works best for those who are suffering from high-interest rates.
Learn more and compare Debt Consolidation offers from variable lenders on lendela.com, offering as low as a 3% APR.