Debt can be a scary nightmare that constantly looms over your life, however it doesn’t need to be a cause of eternal dread. When you learn how to pay off your debts and keep your money in control, the process can feel liberating. Understanding the right way to pay off your debts can even help you lower your time in the red.
Making Minimum Payments
Making minimum payments is the basic and most expected way to pay off your debts. Without this first step, your debt will grow, and your credit score will decline. Before you can make any attempts to reduce your debt in large amounts, you need to be able to accomplish this task.
Your lender will tell you how much you need to pay each month. This is the minimum payment, and you need to stick to it to avoid fines. Your minimum payments will reflect the expected end day for your loan, essentially giving you structure and a timeframe. However, if you want to speeden up the process, then you can try using a different method.
Using the Debt Snowball Method
If you know you can make your minimum payment, but you can also see that you have some extra cash not being used at the end of the month, you can send this money to your lender to reduce your debts.
The idea is that you send a small, snowball sized amount of money to your debt to add to your other payments. You then chip away at the larger debt with these small additional payments.
Some people don’t get paid in monthly installments and instead get paid in weekly installments. These people might find that multiple small payments are more achievable than one big payment.
This method doesn’t tend to lower your debt’s interest rate, but it does help you pay back the amount owed faster.
Using the Debt Avalanche Method
The debt avalanche method has a little more forethought involved. You need to figure out all of your monthly payments and financial obligations and compare it to your income. Any amount of money that isn’t tied up in pre-plan payments (like grocery shopping or rent) becomes a massive payment towards your debts.
You pay off the highest debt first until it has completely gone, and then use the monthly payment you put aside for that debt onto the next highest debt. The idea is that as your debts start to be paid off, the payments you can make become larger instead of being used to fund your personal life.
Some companies help you manage your finances to achieve either of these methods. For example, you can use debt snowball and avalanche invites from CreditNinja.
Sometimes it is easier to manage your debt when they are all in one place. Consolidating your loans is when you move all of your debts into one account. That account pays off the other lenders, clearing your outstanding balance with them, and then moves the debt into one pot.
This is the simplest way to pay off your debts, but the price for easy finances comes at a higher interest rate. The interest rate will match your new, higher balance.
To figure out which method is right for you, you need to figure out how much thought you want to put into your everyday banking and how much money you want to keep in your pocket.
Never Ignore Your Debt
Regardless of which method you pick, the right way to pay off your debt is by paying it. Reducing your debt is better than letting it grow. If any of these methods seem too complicated to you, you can always stick to paying the minimum amount.
Remember, if you ignore your debt, the lender will be entitled to demand their money back. Depending on the small print, they may hire a bailiff to get their money by force if they have to.
Making the minimum payments will keep you on top of your debts and will reduce the amount you own in time.