Is it possible to pay off your debts more easily?
Last update : 2022-12-19 11:15:28
It can be difficult, if not impossible, to carry out the projects that are important to you if you are drowning in debt. Is your financial situation far from ideal and are you having trouble putting money aside for a down payment or an emergency fund?
Money can be a sensitive topic, and being in debt can cause a lot of stress. This is why it's important, albeit seemingly impossible, to get on top of the situation quickly. So, let's explore some strategies that will help you pay off your debts more efficiently.
Identifying your debts
The first step in this delicate process is to put your cards on the table: you must identify all your debts. Knowing the extent of your debts and their terms will allow you to set up a repayment plan. With this in mind, and by being methodical throughout this process, you will be able to pay off your debts much more quickly and easily.
In order to identify your debts, make a list for each of them, indicating:
- The name of the debt;
- Its interest rate;
- The sum of the associated minimum monthly repayments;
- The date of your monthly repayments;
- The due date of these repayments;
- Late fees or penalty fees, etc.
This way, you will have a complete overview of your finances and the status of each of your debts.
Take the time to make a budget
Have you drawn up a list of all your debts? Great, now it's time to create a budget to analyze how your debt repayment fits into your finances. This will allow you to take a look at your financial situation, including your monthly net income, as well as your fixed, variable and occasional expenses.
With this in mind, you may be able to adjust or reduce some of these expenses in order to focus more of your financial energy on paying off your debts.
Making a repayment plan: an essential step
Now that you know what your debts are and what your monthly budget looks like, it's time to take action. While there are no magic formulas for paying off your debts, you still need to come up with a game plan.
Prioritizing some of your debts
First, you need to determine which debts you will repay first. By taking into account the information contained in your list of debts, you will be able to see which are the most urgent to repay. Did you know that in the long run, it is debt with the highest interest rate that costs you the most? This is why many decide to prioritize this type of debt.
In addition, it is important to know that some debts are good and others are bad. Do you know the difference between these two types of debts?
Good debt is considered as an investment, and is therefore profitable in the long run. This includes debts such as student loans and mortgages. Bad debt, on the other hand, includes loans taken out to purchase an object that loses value in the long term. The most common bad debts are from credit cards.
It's important to prioritize these debts as you don't want to pay off those that are less pressing at the expense of some that need to be paid off quickly, and thus paying more in the process.
Consolidating your debts: an option worth considering
Did you know that you could consolidate your debts in order to pay them off? It's an option that can be quite advantageous. You may be wondering what it involves?
It's very simple; consolidating your debts means placing them all together under the same loan. To do this, you will need to apply for a loan from your bank in order to pay off all your debts at once. Thereafter, you will only have to make one monthly payment: the repayment of this loan.
It may be beneficial for you to opt for debt consolidation since, in some cases, the interest rate on the consolidation loan is lower than the interest rate on your various debts. In addition, you will no longer have to worry about juggling a multitude of payments and, as a result, risk neglecting a monthly payment that could result in late penalties.
Contacting your creditors: communication is key
When faced with a difficult financial situation, it is sometimes tempting to try to avoid the problem, to ignore calls, notice letters and late payments that then begin to pile up... However, doing this will in no way help your situation.
In fact, even before missing a first payment, contact your creditors to discuss your situation and possibly negotiate your repayment. The worst outcome is that they simply say no.
In other cases, the creditor may agree to extend your repayment period, reduce the amount of your monthly payments, grant you a deferment of payment, or even reduce the amount of your debt altogether. Communication is indeed a very powerful tool.
The Snowball Method versus the Avalanche Method
Gradually setting up your repayment plan and in need of a boost? Do you know the two most popular methods of debt repayment? They are the Snowball Method and the Avalanche Method.
To use the Snowball Method, you must rank your debts from smallest to largest. Then, you will be required to make the necessary minimum monthly payments on all your debts. Needless to say, the smallest debt will be fully repaid first. However, don't stop paying its minimum payment, instead apply it to your next smallest debt, and so on.
The Avalanche Method, on the other hand, requires you to divide your debts from the one with the highest interest rate to the one with the lowest interest rate. Although you must make the required monthly payment for each of your debts, you must also prioritize the repayment of those with the highest interest. When you have a little money left over or an unexpected cash inflow, invest it in your priority debt. When this one is paid off, focus on the next one, and so on.
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