Loan repayment strategies can help you pay off your debts. Of course, not all will suit your financial situation or your life, but one certainly could.
If you’re looking for an actionable strategy to pay off a loan, multiple loans, and/or credit cards these ideas might help you. Choosing wisely can reduce the amount of interest you pay, keep you from paying penalties, and give you more control over your money.
Let’s take a look at some of your best choices so you can make an informed decision and start your loan repayment journey today.
1. Prioritize Debt Repayment
When you carry a lot of debt, it can feel like you’re going nowhere. You pay and pay, but your outstanding balances never seem to go down. This is very evident when you have multiple debts you need to manage. You pay one bill and then you there’s another due. It can feel more like a juggling act rather than a strategic way to get out of debt.
Luckily, you can prioritize your repayment efforts to tackle your debt head- on. By zeroing in on specific debts you can knock them off one at a time until you’re eventually debt-free.
Still, many people wonder why they should bother. After all, doesn’t everyone deal with debt nowadays?
It’s Expensive to Carry Debt
When you borrow money, you pay interest to the creditor for the privilege of using their money. While it may be very convenient to buy whatever you want without using your own dough, the truth is eventually costs you plenty.
As an example, some credit cards currently have interest rates as high as 36%. That means you pay a lot of interest if you don’t pay the entire balance before the end of your grace period. That’s usually only 28 days. (Oh, by the way, if you don’t pay off your credit card balance, you’ll pay interest on the interest next month and so on). Credit card debt differs from other types of debt and it can be very costly.
Payday loans are also very expensive, with maximum interest rates ranging between 24 and 36 percent, depending on your state. Plus you have less time to repay which puts unnecessary financial pressure on you.
Carrying Debt Impacts More Than Your Finances
One of the biggest issues with carrying debt is that it creates stress. It’s always in the back of your mind and stress affects your mental and physical health. Plus, if you don’t manage your debts well, it can devastate your credit. That can take years to fix. Luckily, you can tackle your debts and lighten the load. Consider using one of the following debt repayment strategies.
Two Popular Debt Repayment Strategies
When it comes to repaying debt, you need to take your time and consider which solution suits you. There is no right or wrong way – just what motivates you, what suits your financial goals, and works best with your debt load.
Gather all your bills and make a list. Include the company, interest rate, and amount owing. Then consider the following repayment strategies and their pros and cons.
Snowball Debt Repayment Strategy
The snowball method gets its name since it tends to build momentum quickly. You make your minimum payments on all your debts, except for the smallest, which you pay off in-full.
Once you’ve paid off the smallest, you add the money the extra money towards your next smallest debt. As you pay each debt off, you have more money to put towards each consequent debt.
Example
Let’s say you set aside $600 towards debt repayment for the month. You have one credit card with a $300 balance and another with a $1,500 balance. You also have a personal loan with a balance of $3,000.
In this case, you would pay a minimum payment of $45 on the card with the $1,500 balance and a minimum payment of $125 on your personal loan. The remaining money pays off the card with the $300 balance.
Next month, you focus on the credit card with the $1,500 balance. Even if you can’t pay it off completely, you’ll have more money to put towards it since you paid off one debt.
Advantages of the Snowball Method
- Great choice to eliminate multiple small debts
- Motivates you to keep going as you see results quickly
Disadvantages of the Snowball Method
- Efforts can stall when you’re dealing with large debts since you don’t see immediate results
- You could pay more interest since you are focusing on the balance, not the interest rate of your debts
Debt Avalanche Repayment Strategy
The debt avalanche strategy works in a similar way to the debt snowball method, except you focus on the debt with the highest interest rate. Once you pay off your first high-interest debt, you take the extra money and apply it to the debt with next-highest interest rate. You still make your minimum payments on your other debts to maintain your credit.
Example
You have one credit card with a 21% interest rate and a $3,000 balance. You also have a second credit card with a 14% interest rate and a $1,100 balance. Finally, you have a personal loan with a 6% interest rate and a $9,000 balance.
Following the debt avalanche method, you make your minimum monthly payments on your second credit card and your personal loan. You apply the lion’s share of your debt repayment money to the first credit card with the 21% interest rate.
Advantages of the Debt Avalanche Method
- Pay considerably less interest
- Works well for multiple small high-interest debts
Disadvantages of the Debt Avalanche Method
- Need patience and discipline if the high-interest debt is large
- Can lose motivation when repaying large debts
- Repayment plan can easily stall if you face unexpected expenses
2. Consolidate Your Debts (Refinance)
Debt consolidation is another popular loan repayment strategy. It involves combining your existing debts into a single financial product such as a personal loan. Most people can consolidate almost any type of debt including credit cards, student loans, medical bills and high-interest loans.
Of course, before you jump on the debt consolidation bandwagon, you need to understand the advantages and disadvantages of doing so. The benefit depends on your life and financial situation as well as your spending habits.
Advantages of Debt Consolidation
- Can save money if the debt consolidation loan has a lower interest rate than your current debts
- Able to focus your money to help you pay down your debt faster
- You pay one payment instead of juggling many
- Monthly payments are easier to budget
- Timely payments on a debt consolidation loan, plus laying off revolving credit such as credit cards, can improve your credit score.
Disadvantages of Debt Consolidation
- You may pay fees to obtain a debt consolidation loan
- If you have a lower credit score, you may not get a great interest rate
- Won’t solve your financial problems if you don’t regulate your spending.
3. Pay Your Debts Off Early
Another great way to reduce your debt load is by bumping up your payments. Even if you can’t do this all the time, every time you do so you will save you interest and lower the outstanding principal.
Still, not all debts allow fee-free prepayment. For instance, if you have a personal loan, you will need to check your loan documents or contact your lender. If the lender does charge a prepayment penalty, it could negate any benefit. The same goes for a mortgage. Sometimes they are open and other times you can only pay extra on the anniversary of your mortgage or the renewal date.
Fortunately, most companies are happy to take extra money. The following are just a few ways you can do this:
- Bump up your monthly payment – just adding on $40 or $50 per month could add up to an entire extra payment for the year.
- Pay every week or bi-monthly – if you divide your monthly payment and pay more often, the principal outstanding goes down quicker and you pay less interest.
- Round up your payments – if you normally make a loan payment of $180, round it up to $200 per month. Do this on all your debts and you’ll chip away at them faster than you might think.
- Commit extra money to debt repayment – if you get a raise, tax refund, or earn money from a side gig, put it straight towards debt repayment. If you don’t see it you can’t spend it.
FlexMoney Offers Loan Repayment Options
FlexMoney offers access to a network of reputable U.S. lenders offering online loans of between $200 and $35,000. If you’re looking to consolidate debt as a repayment strategy, we can help.
Complete one application form and compare interest rates and terms on online installment loans through multiple lenders. Find what’s best for you in just a few minutes. The process does not affect your credit score, plus it’s fast and convenient.
Why juggle multiple debts and struggle to keep on top of your finances? Let us help you take control of your money so you can get on with your life. Apply today.