Having the burden of multiple debts? Yes, this can be overwhelming to manage, especially when it gets tough to know where to start repayment. This is irrespective of the kind of loans or sources of loans making your debt, such as Payday loans and third-party loans.
The good news here is that you can easily manage the repayment with the right strategy. Think this way: An effective debt repayment strategy is like a motivating reaction of a losing commander in a battle to the backward-going army, which, if done on time, leads to victory.
It is crucial to opt for a repayment strategy that works as per your financial situation. Only then you will know how and where to make the payments you owe. This post aims to reveal the proven strategies to help you repay your loans.
Debt Prioritization
The idea of this strategy is simple, first pay off your loans having the highest interest rate. To decide which debts to repay first, two methods exist for you to consider, namely, snowball and highest interest first.
In the snowball method, you keep making all minimum payments each month instead of going by paying debts by their rate of interest. Here, you spend your money to discard the smallest debt first.
Once paid, you now pay the same monthly amount to eliminate the next smallest debt. When this second debt is over, you again pay all your monthly amount toward the next smallest debt. This is how you address the repayment of debts, establishing a drive like a snowball going down the hill.
Another method is to start by repaying a debt having the highest interest rate of all your debts. Nevertheless, this will end up with spending more money eventually than debts charging you with a lower rate of interest despite the principal amount being the same.
It may seem a nightmare to even think of paying off loans with the highest interest rate first, especially when you are having a tough financial time. Well, the fact is that the debt with the highest interest rate is increasing your total liability. This is because repaying involves a significant amount towards interest.
Thus, it is wise to organize the repayment of your loans in this way. Repaying debts having higher interest rates first can decrease the total cost with time. For going with this method, make a list of your debts in descending order of the interest rate and continue to pay the minimum amount payable on them.
However, your focus should be on the additional money that you can spend on the debt with the highest rate.
Debt Consolidation
This is another strategy that not only can make tracking multiple loans easier but also raise the credit score. If the cumulative interests on different loans seem to increase your financial obligation, consolidating all debts is the way to go.
In this strategy, you just go for one more loan to repay all the existing loans. As this sounds wise to some and risky to others, there are some points to consider.
First, you need to know that traditional lenders, such as banks, may not lend you money if your credit score has gone down. A major reason behind this decreased score could be irregular monthly installments. In case you find a bank that is ready to lend, it is more likely to be a secured loan.
Second, if you manage to get an unsecured loan, the interest rate will not be an acceptable one. Last, always assess the term of your new loan. If the term is long, it would mean more accountability in the long run.
In case you are uncomfortable with this additional accountability, debt consolidation is surely not a wise move for you.
Contingency Fund
No one can accurately predict when financial emergencies will strike. Further, they never come with a warning and are unavoidable. Thus, it is wise to be prepared for them so that you do not panic or anxious when they strike.
An ideal way to handle financial emergencies is to start building a contingency fund now. When there are enough savings to pass through the difficult time independently, your mental peace will sustain.
According to the experts, it is good to have a contingency fund that is equivalent to a minimum of three to six months of your income.
No Credit
When you are already in debt, it is unwise to take more loans. Otherwise, repaying your debt will soon be like a never-ending task. Thus, do not take more loans or increase the usage of your credit cards significantly. Rather, consider using debit cards or giving cash.
Conclusion
With these strategies, you will be able to drive the financial roller coaster ride in a way that would bring financial independence. Just select those that seem to work for you.
