How To Pay Off Debt: A Complete Guide
4-Minute ReadUPDATED: July 22, 2022
How To Pay Off Debt Fast
Debt can build up fast and prevent you from enjoying your best life, but you don’t have to live buried in a sea of debt. If your financial situation allows for it, you can pay down your debt over time by attacking it head-on or even making simple lifestyle changes.
Let’s take a look at several of the ways you can effectively pay off your debt.
How To Start Paying Off Your Debt
Your debt won’t go away overnight, but you can take steps to get the ball rolling toward a debt-free life. The suggestions below will put you on the right path.
Figure Out How Much Debt You Have
The first step is to sit down and add up all your debt. You should also determine your good and bad debt so you can know what to target first. Next, calculate your debt-to-income ratio, or DTI, to determine how much money you have left over after paying your monthly bills.
Create A Budget
If you’re serious about getting out of debt, you have to make a budget so you know where every dollar you earn is going. To do this, you’ll need to figure out exactly what you must spend – on food, utilities, transportation costs, your mortgage payments, etc. – and devote every other dollar to reducing your debt.
Build Up Your Emergency Fund
Part of your new get-out-of-debt budget should go toward increasing your emergency fund Having at least some money tucked away will give you some security while you’re paying down your debts.
Increase Your Monthly Savings
You can increase how much you save each month by looking through your monthly bills and deciding which are necessary and unnecessary expenses. For example, monthly subscriptions – like streaming or delivery services – may be extras that you can live without. Factor into your debt repayment plan any money you save by cutting expenses.
Earn Some Extra Cash
Increasing your income can help you start repaying debt. Pick up a second job or a side hustle if possible, but use those extra earnings just for debt payments.
How To Pay Off Debt Fast
If you want to pay off your debt fast and feel financially secure enough to make this attempt, try adding at least a little more money to your payments each month. Consider the following ways to pay more and lower your debt.
Make Biweekly Payments
You can pay off your debt faster by paying every 2 weeks instead of every month. You’ll end up making the equivalent of one extra payment each year. When you pay off debt with a biweekly payment, you may not initially see a dramatic change in your monthly expenses. However, you might see dramatic savings as you pay off debt over months or years since you’re reducing the amount of interest you owe.
Make Extra Payments
You can make a lot of progress on reducing debt by paying more than the minimum amount you owe every month. And one practical way to pay more than you owe is by making a second payment. Let your lender know that the extra payment is to go toward the principal loan balance, which is the original amount of money you received from your lender. Making payments toward the principal also means you’ll pay less in interest over time.
Round Up Loan Payments
Even though it may seem like small change, rounding up your minimum payment each month is a great start to paying more toward your debt. You don’t need a ton of extra cash, and you probably won’t notice the extra amount, given that it’s so small.
Next time you make your payment, just round it up to the next couple of dollars. For example, if your credit card payment is $112.23, add an extra $7.77 to make it $120. Within a year, you’ll have paid an extra $93.24.
Ask For Discounts
Some lenders offer rate discounts if you sign up for autopay or online bill payments. Some even do so if you opt for paperless statements. It never hurts to ask your lender whether your payment history qualifies you for a lower rate. Even a fraction of a percent off your interest rate can make a huge difference in how much you’ll save.
Free Yourself From Credit Card Debt In The Comfort Of Home.
Strategies For Paying Off Your Debt
If you want to see some real progress on your debt repayment or you’re looking to save money in interest, you may want to adopt a more direct plan of attack. Check out the following debt repayment strategies and decide if one works for your situation.
Make A Debt Snowball
The idea behind a debt snowball works like this: You organize your debts from the smallest balance to the largest, without regard for interest rates. For all debts except the smallest, you pay the minimum amount due. For the smallest, pay as much as you can afford until it’s paid off.
Compared to other debt-repayment methods, the debt snowball often reaps the most noticeable rewards by quickly liquidating smaller debts in their entirety.
Create A Debt Avalanche
Another approach is the debt avalanche method where you organize your debt by highest interest rate to lowest and target your most expensive debt first. You can save money in the long term by getting rid of your most expensive debt, but you may forgo the quick wins that the debt snowball method can offer.
Loans that tend to have the highest interest rate include payday loans and credit cards. Loans like federal student loans or your mortgage tend to have lower interest, meaning it’s OK for now to hold off on trying to pay them off early. Plus, federal student loans offer programs like loan forgiveness or income-based repayment plans, which can lower or eliminate part of your debt.
Gather Debt Snowflakes
Continuing with the snow metaphor, the debt snowflake can be a complementary strategy to the snowball or avalanche method. The idea behind debt snowflakes is that you take any amount of money you may happen to find and allocate it toward your debt goal. For example, if you find a $5 dollar bill emerging from the melting snow, it goes toward your snowball or avalanche target. These micro-amounts can add up more quickly than you might think and help you reach your goals faster.
Consolidate Your Debt
Debt consolidation is a great way to simplify your debt and save money at the same time. Consolidating your debt means that you take out a debt consolidation loan, like a personal loan, to pay off your credit card debt. You’re then left with one loan payment at a fixed, and usually lower, interest rate.
Consolidating your debt can make it cheaper and more convenient to pay off. It also allows you to plan your budget around a payment that won’t vary unless you choose to pay extra so you can pay the loan off faster.
Options for debt consolidation include:
- Getting a personal loan
- Taking out a home equity loan
- Signing up for a balance transfer credit card
- Borrowing money with a 401(k) loan
Alternatives To Paying Down Your Debt
At the far end of the debt spectrum, where debtors are being hounded by creditors, debt relief plans can help you manage your financial issues. The downside is that these plans have the potential to cause severe damage to your credit score.
Before agreeing to any debt relief plan, it’s best to plan carefully and speak with a reputable credit counseling service, a financial adviser or an attorney specializing in debt relief and bankruptcy.
Negotiate A Debt Management Plan
Some credit counselors may recommend you enroll in a debt management plan (DMP). A DMP won’t lower the balance you owe, but your counselor can help you schedule out a monthly payment and get your money where it needs to go. Your counselor may even be able to negotiate on your behalf for a lower interest rate.
Debt management plans can cost $50 – $100 to negotiate, and then $75 per month to service. This is in addition to the monthly payments you must make toward your debt.
Settle Your Debt
A debt settlement plan is similar to a debt management plan in that it likewise requires negotiation with creditors. But with a debt settlement, a creditor agrees to take a lump sum payment (usually somewhat below the balance you owe) as payment in full. Typically, creditors will only undertake these negotiations when they’re convinced you’ll end up with no choice other than bankruptcy, in which case they may get nothing.
Investigate Bankruptcy Proceedings
A bankruptcy is a legal proceeding that seeks to give debtors an opportunity to clear their past debts and get a fresh financial start. It also grants them immediate relief from creditors’ collection attempts.
It’s a good idea to reach out to your lenders before beginning bankruptcy proceedings. Negotiating a deal is almost always a better option.
Here’s a breakdown of the two most common types of bankruptcy from the United States courts: Chapter 7 and Chapter 13 bankruptcy.
- Chapter 7: If you are seeking to discharge your debts, make below your state’s median income, and own few if any assets, you can file for Chapter 7 bankruptcy to discharge your
- Chapter 13: If you make more than your state’s median income or own significant assets, bankruptcy proceedings are a bit more complicated. The court will consider all of your debts and assets and decide whether you can repay the debts with a court-imposed repayment schedule. The court will also consider your assets and decide which to sell to repay creditors.
Final Thoughts: Pay Off Your Debt The Best Way You Can
Freeing yourself from debt can create new opportunities to live life to the fullest, but it’ll take some work to get there. Think about ways you can tackle your debt and choose the plan that works best for you.
If debt consolidation sounds like your way out, check your rates and get prequalified today for a personal loan with Rocket Loans℠.
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