Debt Repayment Strategies That Work

Taking out a personal loan might be easy for you if you choose the right lender. However, managing repayment can be challenging if you don’t know the best debt repayment strategies. Over time, it can get difficult to accommodate debt repayments while managing personal finances.

In fact, many individuals get caught in a debt cycle by setting up new loans to pay off old ones. However, you can avoid being in a similar situation. In this short post, we’ll go over several effective ways you can overcome debt while regaining financial freedom.

The strategies we'll discuss are not just for personal loans, but can also help repay credit card debt and student loans efficiently. Here’s more!

Effective Debt Repayment Strategies – Tips for a Debt-Free Future

We want you to fully recover from your debts for a debt-free future. So, we advise that you start by creating a list of all your active and outstanding debts. Then, you should have a comprehensive record of payments that includes interest rates, minimum monthly payments, and remaining balance.

This will give you a clear idea of where you stand with your current financial obligations. More importantly, this will help you prioritize the most important debts first. Let’s begin with the most effective strategies for debt repayment below:

1. Debt Avalanche Method

Using the debt avalanche strategy, you can start by repaying debts that have the highest interest rates. By prioritizing ones with high interest rates, you can avoid paying more than the principal amount, reducing the financial strain on yourself.

We advise that you start by listing all your debts, starting with the one that has the highest interest rate. If there’s more than one, let’s say two, then you can prioritize based on which one is due early. You will have a list of debts with descending interest rates.

Next, you can create a repayment plan where you pay the minimum on other debts while allocating extra funds toward the debt with the highest interest rate. Once that debt is gone, you can move to the one with the second-highest interest rate. This continues until all debts are paid, potentially saving you money in the form of interest payments compared to other strategies.

2. Debt Snowball Method

In this debt repayment strategy, you will also create a list of all of your active debts. However, instead of the interest rate, you focus on the outstanding balance of each debt to find out which one is the highest. You should create the list in that order, starting from the debt with the highest remaining balance all the way to the one with the lowest outstanding balance.

Now, you can start by paying off the smallest debts first while ensuring minimum payments on all other debts. Once the smallest debt is off your account, you can move on to the one with the second-smallest balance. Note that the amount you were allocating to the first debt can now roll over to the second debt to repay it quickly.

You can continue this process until all the debts are paid off. In the debt snowball method, individuals get a psychological motivation resulting from small debt payoffs as "quick wins". This builds the repayment momentum required to tackle larger debts without worrying about interest payments on smaller ones.

3. Debt Consolidation Method

One of the most popular loan debt repayment strategies is debt consolidation. Juggling repayments and calculating interest on multiple debts can be a challenging task. Plus, it can get even more difficult to track whether you’re potentially benefitting or ending up in a bigger debt overall.

With the debt consolidation strategy, you can unify all the debts into a single loan. This often leads to one big loan with a lower interest rate to simplify the payment process. It involves applying for a loan consolidation process that covers all the existing active debts. Next, you adjust the interest rate with the help of professionals after a thorough negotiation.

As a result, you can pay off high-interest debts at a lower interest rate and a single monthly repayment plan by simply unifying all debts. It is also a feasible strategy if you’re looking to reduce the total interest paid and improve financial activity.

4. Balance Transfer Method

The next strategy in our post focuses on credit card debt, one of the most debilitating financial challenges that individuals face. The balance transfer is an effective strategy to help you consolidate debt and decrease the total interest paid over time.

You begin by transferring the high-interest credit card balance to a credit with a lower interest rate, preferably 0% introductory Annual Percentage Rate (APR). This allows you to take advantage of the promotional period to pay off your debt without accruing interest.

In simple words, this strategy adds a buffer between several interest payments to help you allocate funds towards principal amount repayment. We advise that you seek professional help and discuss any balance transfer fees that might exist with your chosen credit card service provider.

5. Cutting Expenditure and Increasing Income

Notice how we focus on cutting expenses first and increasing income second. It is one of the archaic debt repayment strategies that work for individuals caught in debt. You can consider different ways to reduce expenses, such as:

• Creating a budget;
• Tracking and cutting back on unnecessary spending;
• Putting vacations and holidays on hold;
• Avoiding leisure spending, and so on.

Meanwhile, you can also focus on increasing your income by setting up side hustles or exploring other options. We advise you to utilize your existing skill set or develop new skills to:

• Apply for part-time jobs;
• Set up freelance work profiles;
• Start a small business (side hustle), and so on.

You can also sell unused items and any extra income you receive, allocating it to the payment of debts with the largest outstanding balance can accelerate the repayment process.

Conclusion

You can combine several debt repayment strategies to speed up the loan settlement process. However, you will need to be disciplined and strategic, such as by starting with the most important debts first. Depending on your current debt-to-income ratio, you might choose to go with the smaller debts first.

You can explore debt snowball and avalanche methods for a strategic approach. Or, you can go for debt consolidation for a more proactive repayment strategy. Regardless, your choice of debt repayment strategy should align with your financial goals and income health.

Planning to take out a quick and easy personal loan with manageable repayment plans? Contact Magical Credit and talk to an expert today!