Debt, or consumer debt, is what you owe based on the money you borrowed from a credit union, bank, the federal government, or other lending entity. There are two types:
- Revolving Debt– The most common example is a credit card. You have an amount (or limit) that you can borrow up to. When you pay this debt down, you can borrow into this line of credit again. The line of credit does not go away once the balance has been paid off.
- Non-Revolving Debt– This type of debt is what most of us think of as a loan. It is held for the life of the asset used as a collateral and you pay off monthly with corresponding fixed or variable interest rate. Examples: Auto loan, student loan, and emergency loans.
As of January 2018, consumer debt in America rose 4.3 percent, totaling $3.855 trillion. $2.8 trillion accounts for non-revolving debt while the remaining amount is for revolving.
Regardless of the type of debt you have, one thing is for sure: you owe someone a sum of money and you need to pay it to avoid consequences in the future. Speaking of repayment, here are 6 tips to get out of debt:
List ALL of your debts.
This is the first step you need to do as you go through the repayment process. You need to know how much you owe to each lender, including the interest rate and maturity date of the loan. Be specific since this will guide you in getting you out of debt.
Make sure that you list everything, regardless of the amount. This will give you a better idea of your financial standing and make it easier for you to decide how to pay them, which leads you to the next tip.
Strategize repayment of your debts.
Now that you know how much you owe, the next step is to come up with a strategy to pay them.
Ideally, you can pay off the loan that charges the highest interest rate as these are the most "expensive" lines of credit. This will allow you to save more and make it easier for you to pay other loans since the money you use to pay interest is reduced. A second strategy is to pay the loan with the earliest maturity date to avoid incurring penalties. If you want to reduce the number of debts, then pay off the loan with the smallest outstanding balance.
Negotiate your loan terms.
This is another easier and convenient way to pay off your debts. Negotiate for lower interest rate or longer payment terms to help you pay your financial obligations.
If you have several loans under a single creditor, then try consolidating them so you don’t have to worry about multiple rates and due dates. You can also suggest other terms such as a bi-weekly payment scheme or waiving of the termination fee in case of early repayment.
Nonetheless, negotiation will be possible if you have a good relationship with your creditor. If you have a good payment history and account standing, then you have a better chance of negotiating your loans to save more. It is always in the bank's interest to have you pay the debt. Bankruptcy or foreclosures cost the banks more money.
Use your savings to pay off loans.
Do you have a separate account for savings or Emergency Fund? If your debt is mounting and you have aggressive rates of interest, then perhaps now is the best time to use it. This will prevent you from incurring ballooning debt. You might be uncomfortable at first. However, using your savings to pay existing financial obligations will also make it easier for you to set aside money for future use.
Still, don’t use your entire savings to pay your loans. Focus on loans with the highest interest rate. Paying them off first creates a big dent on your financial standing, thereby minimizing your loans.
In case you are not comfortable using your savings, you can try the next tip.
Look for extra job(s) for additional income.
Side hustle opportunities are everywhere. It’s just a matter of finding the right one for you. Look around for opportunities that enable you to earn extra to repay your loans faster without taking money away from savings.
You can try the following:
- Hold a garage sale and sell items you no longer need but can be useful for other people. You can also sell them online through eBay or Craigslist.
- Get into freelancing that matches your skill.
- Apply for a part-time job near your place.
The amount you will earn may not pay the entire loan but this could be helpful in reducing your debt. Take advantage of it.
Use your bonuses wisely.
If you receive a tax refund or bonus from your employer for good performance, what will you do with the money?
Shopping or eating out with the family can be a fun option. If you want to be wiser, then you could use the extra money you have to pay for your existing financial obligations. When you do, you will be able to reduce the principal amount of loan and minimize the corresponding interest as well. It’s a sacrifice on your part, but a sacrifice worth it because you minimize your chances of swimming in a pool of debt.
The key here is to take it one step at a time. Repaying your loans don’t happen overnight, but always remember that every payment matters.