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7 Debt Repayment Strategies: How to Get Rid of Debt

Choose a strategic repayment plan tailored to your financial situation to pay off your debts.

Reducing debt requires commitment and planning. By prioritizing high-interest debt, developing a repayment plan, and avoiding new debt, you can take control of your financial future and work towards a debt-free life.

Remember that progress may take time, but you can achieve debt freedom.

Follow these steps to assess your debt situation.

Step 1: List Your Debts

Compile a list of all your outstanding debts, including credit card balances, personal loans, student loans, auto loans, and other debts. Organize the list by including the following details:

  • Type of Debt
  • Outstanding Balance
  • Interest Rate
  • Minimum Monthly Payment
  • Due Date

Here’s an example of how you might organize the information.

Type of DebtOutstanding Balance ($)Interest Rate (%)Minimum Monthly Payment ($)Due Date
Credit Card$5,00018.99$20015th of the month
Student Loan$20,0004.5$3001st of the month
Car Loan$15,0006.25$35010th of the month
Personal Loan$10,0008.75$20020th of the month

Learn more on how to list your debt.

Step 2: Choose Your Debt Repayment Strategy

Consider different repayment strategies to tackle your debts effectively.

Option 1: Debt Avalanche Method

Under this method, you prioritize debts with the highest interest rates while making minimum payments on all other debts. Once the highest-interest debt is paid off, you move on to the next highest-interest debt, and so on.

The following table represents the debt avalanche method, in which debts are prioritized based on their interest rates, with the highest-interest-rate debt paid off first.

Type of DebtOutstanding Balance ($)Interest Rate (%)Minimum Monthly Payment ($)Monthly Additional Payment ($)
Credit Card$5,00018.99$200$100
Personal Loan$10,0008.75$200$100
Car Loan$15,0006.25$350$150
Student Loan$20,0004.5$300$200

Option 2: Debt Snowball Method

With this method, you first focus on paying off the debt with the lowest balance while making minimum payments on all other debts. Once the smallest debt is paid off, you apply the payment amount to the next smallest debt, and so forth.

The following table shows the debt snowball method, in which debts are prioritized based on outstanding balances, with the smallest debt paid off first.

Type of DebtOutstanding Balance ($)Interest Rate (%)Minimum Monthly Payment ($)Monthly Additional Payment ($)
Credit Card$5,00018.99$200$100
Personal Loan$10,0008.75$200$100
Car Loan$15,0006.25$350$150
Student Loan$20,0004.5$300$200

Option 3: Debt Consolidation

Debt consolidation involves combining multiple debts into a single loan with a lower interest rate, typically through a personal or home equity loan. By consolidating your debts, you can simplify your repayment process and potentially lower your overall interest rate, reducing the total amount you’ll pay over time. This strategy is particularly beneficial if you have high-interest credit card debt to transfer to a lower-interest loan.

The following illustrates how debt consolidation works.

Type of DebtOriginal Balance ($)Interest Rate (%)Minimum Monthly Payment ($)
Credit Card 1$5,00018.99$200
Credit Card 2$3,00015.00$150
Personal Loan$7,00010.00$250
Student Loan$10,0006.00$300
Total$25,000$900

In this scenario, you have multiple debts with varying interest rates and minimum monthly payments. Now, let’s see how debt consolidation works:

Consolidate: You apply for a debt consolidation loan with a lower interest rate than the average interest rate of your existing debts. Let’s assume you’re approved for a consolidation loan with an interest rate of 8%. After approval, you use the consolidation loan to pay off all your existing debts, effectively consolidating them into a single loan with a fixed interest rate and monthly payment.

Type of DebtOriginal Balance ($)Interest Rate (%)Minimum Monthly Payment ($)
Consolidation Loan$25,0008.00$600

Repayment: With the consolidation loan, you now have a single monthly payment of $600, which is less than the total minimum monthly payments of your previous debts ($900). This simplifies your debt management and may result in lower overall interest payments, saving you money in the long run.

Option 4: Bi-Weekly Payments

With the bi-weekly payment strategy, you make half of your monthly payment every two weeks instead of making one monthly payment. This results in 26 half-payments per year, which equals 13 full payments, effectively making one extra payment each year.

Let’s consider a scenario with the following details:

  • Original balance: $5,000
  • Interest rate: 18.99%
  • Minimum monthly payment: $200

We’ll compare the difference between making monthly and biweekly payments on this debt.

Payment FrequencyPayment Amount ($)Number of Payments per YearTotal Payments per Year ($)Total Payments over 3 Years ($)
Monthly$20012$2,400$7,200
Biweekly$10026$2,600$7,800

Comparison: While the total amount paid over three years is higher with biweekly payments ($7,800 compared to $7,200 with monthly payments), biweekly payments can help you pay off the debt faster due to the extra payment frequency.

Biweekly payments result in an extra payment each year, accelerating the debt payoff timeline and reducing the total interest paid over the life of the debt. This strategy is particularly effective for loans with high-interest rates and long repayment terms, such as mortgages and student loans.

Example: If your monthly mortgage payment is $1,200, you would pay $600 every two weeks instead. Over time, the extra half-payment each year can help you pay off your mortgage faster and save on interest costs.

Option 5: Refinancing Debt

Refinancing debt involves taking out a new loan to pay off existing debt, typically with more favorable terms such as a lower interest rate or longer repayment period. It can help borrowers save money on interest, lower monthly payments, or consolidate multiple debts into a single loan.

Let’s consider a scenario with the following details:

  • Original loan amount: $20,000
  • Original interest rate: 6.5%
  • Original loan term: 5 years (60 months)
  • Monthly payment: $389.07

You’re considering refinancing this loan with a new loan that offers better terms:

  • New loan amount: $20,000
  • New interest rate: 4.5%
  • New loan term: 5 years (60 months)
  • Monthly payment: To be calculated
DetailsOriginal LoanRefinanced Loan
Original Loan Amount$20,000$20,000
Original Interest Rate6.5%4.5%
Original Loan Term5 years (60 months)5 years (60 months)
Monthly Payment$389.07To be calculated
Total Interest Paid$3,344.20To be calculated
Total Payment over 5 Years$23,344.20To be calculated

Calculating New Monthly Payment: We can use a loan amortization formula or an online loan calculator to calculate the new monthly payment. Assuming the refinanced loan has the same term of 5 years (60 months), the new monthly payment can be calculated based on the new interest rate of 4.5%.

By refinancing the original loan with a new one at a lower interest rate, the borrower can save money on interest and lower the monthly payment.

In this scenario, the new monthly payment is reduced from $389.07 to approximately $372.86, resulting in savings over the loan term. Additionally, the total interest paid over the life of the loan is reduced.

Option 6: Zero-interest Balance Transfers

A zero-interest balance transfer involves transferring the outstanding balance(s) from one or multiple high-interest credit cards or loans to a new credit card that offers an introductory period with no interest charges.

This strategy can help individuals save money on interest and pay off debt faster by consolidating balances onto a single card with a promotional 0% APR (Annual Percentage Rate) period.

Let’s consider a scenario where you have multiple credit card debts.

Credit CardOutstanding Balance ($)Interest Rate (%)Minimum Monthly Payment ($)
Card A$5,00018.99$200
Card B$3,00021.99$150
Card C$2,00024.99$100
Total$10,000$450

You’re considering transferring these balances to a new credit card with a 12-month zero-interest balance transfer promotion.

Credit CardOutstanding Balance ($)Interest Rate (%)Minimum Monthly Payment ($)
New Credit Card$10,0000 (Introductory)$0 (Minimum)

Zero-Balance Transfer Process:

  1. Apply for a New Credit Card: You can apply for a new credit card with a zero-interest balance transfer promotion.
  2. Transfer Balances: Once approved, you initiate balance transfers from your existing credit cards to the new credit card. The outstanding balances from cards A, B, and C are transferred to the new credit card.
  3. Introductory Period: The new credit card offers an introductory period with a 0% APR on balance transfers for the first 12 months. During this period, no interest charges accrue on the transferred balances.
  4. Repayment: You continue making monthly payments towards the transferred balances on the new credit card. Since there is no interest accruing during the introductory period, all payments go towards reducing the principal balance.

It’s important to pay off the transferred balances before the end of the promotional period to avoid accruing interest charges at the regular APR after the introductory period expires.

Option 7: Debt Settlement

Debt settlement involves negotiating with creditors to settle your debts for less than the full amount owed. This typically requires making a lump-sum payment to the creditor, often at a significant discount, in exchange for forgiving the remaining balance.

Let’s consider a scenario.

  • Original balance: $10,000
  • Negotiated settlement amount: $5,000 (50% of the original balance)
  • Settlement fee: $500 (10% of the negotiated settlement amount)
  • Total settlement cost: Negotiated settlement amount + Settlement fee
DetailsAmount ($)
Original Debt Balance$10,000
Negotiated Settlement$5,000
Settlement Fee$500
Total Settlement Cost$5,500

Debt Settlement Process:

  1. Negotiation: You negotiate with the creditor or a debt settlement company to settle the debt for less than the full amount owed. After negotiations, you agree on a settlement amount of $5,000.
  2. Settlement Fee: In addition to the negotiated settlement amount, a settlement fee may be charged by the debt settlement company. Let’s assume the settlement fee is 10% of the negotiated settlement amount, resulting in a fee of $500.
  3. Total Settlement Cost: The total cost of the settlement is the negotiated settlement amount plus the settlement fee. In this scenario, the total settlement cost is $5,500.
  4. Payment: You make a lump sum payment of $5,500 to the creditor or debt settlement company to settle the debt.

Debt settlement can be an option for individuals who are struggling to repay their debts and facing financial hardship. By settling the debt for less than the full amount owed, you save $4,500 ($10,000 – $5,000) on the original debt balance. However, it’s important to note that debt settlement may have negative consequences on your credit score and may result in taxes on the forgiven portion of the debt.

Step 3: Allocate Extra Money

Identify any additional funds you can allocate towards debt repayments, such as windfalls, bonuses, or extra income. Apply these extra funds towards your prioritized debts to accelerate repayment and save on interest charges.

Consider starting a side hustle to help you earn extra money toward debt.

Step 4: Maintain Timely Payments

Ensure you make timely payments on all your debts to avoid late fees, penalties, and damage to your credit score. Set up automatic payments or reminders to stay on track with your repayment plan and avoid missing due dates.

Conclusion

In addition to the Debt Avalanche and Debt Snowball methods, there are several other repayment strategies that you can consider. Whether consolidating debts to lower interest rates, making bi-weekly payments to accelerate repayment, or negotiating settlements with creditors, exploring different repayment strategies can help you find the best approach for your financial situation and goals.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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