Ways to pay off your debts early
In this guest article, Tudor Lodge Consultants explore several ways that you can pay off your debts early.
Paying off your debts can be a daunting task but luckily there are different ways to approach it. For example, if you need to borrow money online, you may look to pay off outstanding and existing debts which could help you manage your finances better. Debt repayment can potentially be easily managed if you take the following steps.
What To Consider Before Paying Off Your Debt
Before deciding how to approach your debt, there are certain initial steps you should take.
Know how much debt you owe – Make a list of all your debt to see how much debt you actually owe in total. At this step you should be as detailed as possible, taking note of the debt name or account, the type of debt that it is, what the balance is, what the interest rate is, what the payment term is and the monthly minimum payment.
What is the maximum you can afford to pay each month? – Consider your budget carefully, taking into account your monthly income as well as your existing outgoing expenses. Think about how much you will need to pay in order to cover your essential spending (i.e. rent or mortgage, utilities, insurance and food).
Also, look at your non-essential spending and see if there are any luxuries you do with cutting out or cutting down on. Have a look at how much you currently put towards paying off your debt and see whether you could increase this contribution.
What strategy will you use to repay your debt? – Generally speaking, there are three main ways to repay your debt or at least help you to manage your debt more effectively.
Debt Snowball Method
The snowball method involves eliminating the smallest debt as fast as possible and paying the minimum on all your other existing debts. Any extra money that you have, you put towards paying the next largest debt until you work through them all.
The benefit of the snowball method is that you can quickly pay off certain debts which can make people feel good about themselves. Even if you have only paid off a small balance, it makes you feel confident to see that some of your debts are disappearing. This acts as a psychological motivator and encourages you to continue paying off debt.
Debt Avalanche Method
When you choose the debt avalanche method, this involves paying the largest debt or the one with the highest interest rate as fast as possible and paying the minimum amount on all other debts. For example, if you have a $500 loan, you would repay that before a smaller $100 loan. After you have done this, you then pay any extra towards the next smallest debt.
People often opt for the debt avalanche method because it helps them feel in control of their debt. Once they have their largest debt out of the way, they only have small amounts of debt to focus on which pale in comparison. It also helps them get rid of a large amount of interest, which can save them money in the long run.
Debt Consolidation Method
With debt consolidation, an individual takes all of their debt to combine it into one single account. They then work to pay off their collective debt in monthly instalments and avoid any other debt until they have fully repaid the existing debt.
Debt consolidation makes it easier to manage your debt and helps people to budget in the long term as they know exactly how much the single payment will be each month. Borrowers could also benefit from lower interest rates if they choose to consolidate their debt. Many find that having just one account increases their focus.