Are You Trapped In Debt? Here’s How To Pay Off What You Owe Faster
Does thinking about how much you owe feel overwhelming?
From tackling debts with the highest interest rates first and identifying which outstanding credit card bill you should pay, the first step is to have a plan to manage your debt that can save you money in the long run.
Removing easy access to spending your available cash such as deleting your credit card information online, or freeing up some cash by selling unwanted items are ways you can start to take steps to tackle your debt problem. Even making small changes to your monthly spending habits are among the steps anyone can start practising now to save more money towards debt repayment.
Have a strategy to pay off your debts
Eliminating discretionary spending can put the brakes somewhat on burning a hole in your finances but you will need a clear strategy to make real inroads in clearing your debt faster.
Here are some common strategies that can be effective in controlling your debts.
1. The ‘snowball’ method
The often quoted “snowball” method asks you to pay down the account with the smallest balance first. Once that’s done, move on to your next smallest balance.
Like a tiny snowball rolling down a mountain, it gains momentum and grows in size so when you pay off smaller debts quickly, the amount of money you have to pay subsequent debts ‘snowballs’ with each loan paid off.
This method requires you to keep the other repayments on debts to the minimum required until the current debt you are focused on clearing is paid off, including using any savings from your monthly expenses to pay towards this account.
This cycle continues “snowballing” until you’ve paid off all your debts.
2. The ‘snowflake’ method
The approach is based on the debtor making small debt repayments more frequently to eventually make a bigger impression on reducing your overall debts but you still need to make sure your monthly payments cover the minimum amount due on each debt.
This approach requires you to have the discipline to ensure that any extra income you receive will be put towards paying your debts.
These small “snowflake” payments are aimed at instilling the idea that small consistent steps can produce big gains in reaching your debt-free goal. For most salaried employees or those working multiple jobs, it might be more manageable on your finance to make frequent smaller payments instead of one large monthly deduction.
3. The ‘avalanche’ method
Another popular strategy entails paying off the highest interest rate debt first, working your way through until the lowest interest rate debt on your list.
The difference here is prioritizing your debts according to their interest rate. By repaying as much money as feasible for the debt with the highest interest rate, one will minimise the total amount of interest payable for the loans in its entirety.
It certainly makes sound financial sense to reduce the total amount paid towards servicing debt and certainly serves as a good foundation for better personal financial health.
As we highlighted previously, the best method to pay off your debt really depends on you. Do you have the willpower to commit to paying off the debt with the highest interest first or will clearing smaller debts motivate you more?
Have you considered consolidating your debts?
There are steps you can take to reduce debt immediately with preventive measures like curbing your lifestyle spending on your credit card, putting the brakes on incurring new debt, looking for additional income streams and sticking to a monthly budget.
However, there are other ways that you can take control of your debts and save money at the same time.
For instance, many Filipinos may already have outstanding small loans taken out for big-ticket personal family expenses or a high-interest credit card debt. This is where debt consolidation can simplify and improve your debt repayment.
Debt consolidation refers to merging several loans into one that offers a lower interest rate, often with the use of a personal loan.
What you should know about debt consolidation:
- A useful way to pay down existing high-interest debt with a lower-interest personal loan
- You can combine different types of existing debt into one, making debt repayment more manageable
- Take advantage of the lower interest rate and lower monthly payments to pay off your debt faster
After you have listed down the total size of all outstanding loans and the repayment duration left, the next step is to find out which financial institution will offer you the best personal loan.
Use comparison sites such as iMoney to help identify the financial institution best suited to your needs. If you are ready to take out a personal loan, why not talk to the right people who can walk you through the requirements and recommend the product that has a higher chance of approval.
This article was first published in November 2018 and has been updated for freshness, accuracy and comprehensiveness.