The 2021 edition of 'Surviving Debt' by the National Consumer Law Centre highlights that repayment of debt starts with the basic tenet of prioritising debts whose non-payments immediately harm your family. Paying off debt can be an arduous journey, depending on your financial situation. capacity. Hence, it is important to create a systematic plan to pay it off. While money impacts our lives strongly, many individuals lack the adequate financial literacy to effectively navigate the challenges that affect them.
One could be juggling multiple debts, like credit cards or personal loans with exorbitant interest rates or loans taken from new-age fintech apps with their predatory tactics, which are revealed only if you read the fine print. When confronted with financial difficulties, people often prioritise paying off certain debts while neglecting others. However, this selective approach can result in dire consequences. Many individuals assume that they will swiftly overcome the remaining debts within a few months, but this mindset leads to penalties and subsequently snowballs into even larger payments. Extending the loan period results in the accumulation of further interest, leading to a never-ending debt cycle.
It is, therefore, pertinent to understand what debt strategy works best for one’s situation. Here are a few thumb rules to help prioritise your debt repayments.
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Create a budget
A budget will give you a clear understanding of your financial situation and help you plan the allocation of funds towards your debt repayments. Start by evaluating your income, expenses, and debt obligations. Next, decide where you might want to tighten your spending a little so you have more money to spare for debt repayment. This way, you can make progress towards paying off your debts.
Knock off the high interest
High-interest debts can quickly accumulate to become a significant financial burden. In general, many people tend to prioritise debt repayments without realising the consequences of high-interest debts. For example, the notoriously high Annual Percentage Rate (APR) or interest rate on credit cards, Buy Now, Pay Later (BNPL), or other high-interest rate loans.
Debt with higher interest rates can cost you more in the long run. You could consider paying these off first. Here is a method that can come in handy for systematically paying down your debt to save money: Depending on your debt portfolio, you could pay the largest balance first if you hold debts with the same interest rates, or pay the debts with high-interest rates first in the case of loans with varying interest rates. This is popularly known as the ‘debt avalanche’ method.
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Snowball for the right momentum
The ‘snowball method’ is another thought-worthy alternative for those looking for a swift sense of achievement on their debt repayments. You could list down your debts from the smallest to the largest, regardless of their interest rates, and start paying them off in the same order. Make minimum payments on all your debts, barring the smallest. Direct the extra money towards paying off the smallest debt and continue to work your way up to larger debts. Slowly gaining momentum, you can close all your debts.
Know the consequences of a default
Defaulting on a credit card or loan repayment can have serious consequences. These can range from a negative impact on one’s credit score, loss of creditworthiness, higher interest rates on current and future borrowings, to potential legal action from the creditor. Collection activities can add to the agony of a burdened borrower. In the case of multiple open-ended debts, one should consider carefully looking through the loan terms to understand the repercussions of a payment default.
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Seek professional advice
Consider seeking professional advice if you feel trapped in debt. Debt relief companies can provide guidance and create a customised plan based on your unique financial situation and goals. These programmes assess the borrower's debt and financial situation to provide customised debt relief solutions and help them become debt-free. It is always easier to overcome a situation if you have an expert on your side.
Look for well-established companies with good track records and positive reviews from customers. Start by researching online and reading reviews on trusted platforms. Ask for referrals from friends, family, or colleagues who have worked with debt relief professionals. Personal recommendations are a reliable way to find trustworthy experts.
Prioritising different debt payments is crucial for achieving the goal of financial freedom.
While the goal is to become debt-free, it is equally important not to go overboard with analysis. The key is to keep it simple and not lose momentum. Remember, every debt repayment strategy requires financial discipline and steely resolve. And it is absolutely worth it when you are eventually debt-free.
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