Ways to Pay off Debt
The most common ways to pay off debt are simple overpayments and merging debts together into a larger loan.
There are plenty of other ways though, some more painful than others. Some of your options are listed below in these 10 ways of paying off debt.
1. Start with a budget
How can you start to pay off debt if you don't know what your financial situation is or how much you can afford to pay? Make a note of your income and outgoings over a month by creating a budget and from there start your own debt payback plan using the tips below.
2. Maximise your income
One of the easiest ways to pay off debt is to maximise your income and then use any additional or surplus income you have to pay your creditors. You can do this by cutting back on your outgoings so you spend less of your income, or you can increase your income by earning more either by renegotiating your salary, working more hours or taking a second job. You should also look at whether you are eligible for any benefits such as tax credits or income support.
3. Pay off more than you owe (overpay)
One of the most effective ways to pay off debt is to overpay. This is perfect if you only have a few, manageable debts and you have already maximised your income. Not only does it mean you pay off your debt sooner, you'll also pay less interest than you would have done if you'd stuck with the original payment plan.
You can usually overpay on any type of loan from a mortgage to a credit card and it's a great way of ensuring you pay less overall. Even if you overpay just £5 each month, it will make a big difference to the total amount you pay back.
4. Use any savings you have to pay off your debts
To some people, this is a cardinal sin, but to others it makes perfect sense. Why let your savings fester in a low rate savings account when they could work harder for you paying off your debts that have much higher interest rates?
You'd never be able to match your savings rate to the interest rate on your debts, which for some store cards is almost 30%! As your interest on the credit increases, the interest you gain from having your savings in the bank simply can't match the credit interest, so your debt just increases. Take the money and pay off the high interest credit cards, store cards or loans!
It's one of the fastest ways to pay off debt, but, if you're going to use your savings, make sure you leave yourself a cushion 'just in case' you need to access money fast.
5. Snowball your debts
Of all the ways to pay off debt, I really like the snowball technique. With this idea, you pay the minimum on all your debts, except one where you pay off as much as possible, or overpay as mentioned above.
Once you've paid off the first debt, you then take the money you used to pay off the first debt and add it to the minimum amount you're on the next high interest debt. The principle is to keep the money you pay off in one lump and as a debt gets paid off, you roll that money into the next debt. As time marches on, your debts reduce. It's manageable, simple and effective.
You can see how this would work with your debts using free debt reduction software.
6. Make the most of a low rate credit card
If you've got lots of credit card debt, you could transfer some, or all of your debt onto one credit card with a lower interest rate. There are loads of 'balance transfer' offers on the market, but it's important to find one that offers a low rate over a lengthy time period.
The objective is to pay off as much of the loan as possible within that time period. In principle balance transfers are great, but it's important that you don't transfer your debt only to start using your old cards again and get into more debt. Stay out of debt by canceling and cutting the old cards up!
Read more about the pros and cons credit card consolidation and balance transfers at Reduce Credit Card Debt.
7. Take out a home equity loan
The industry talks of a 'home equity' loan, but in reality you're simply increasing your mortgage. You can only do this if you have equity in your home and with the recent housing crash, many people don't have this option open to them.
If you're lucky enough to have some equity in your home, it's worth considering this as it's one of the most cost effective ways to pay off debt. You will be borrowing money at a low interest rate (your mortgage interest rate) and turning your debts into one payment.
As with any loan there are risks and if you're suddenly unable to meet the payments, you could risk losing your home.
8. Talk to your creditors
One of the most effective ways to pay off debt is to speak to your creditors. You'll be surprised how accommodating they are. After all, they'd rather get the money back than take you to court which is an expensive business.
There are several options they can offer you depending on your situation. The first is extending the duration or term of the loan, so that you pay less each month, but pay the loan back over a longer time period. This makes paying easier for you, but overall, you will pay back more than what you initially agreed.
The second option is to negotiate a lower interest rate which would mean your monthly payment is reduced along with the total amount you pay back. This is the better option and you should try for this first before looking at extending the length of the loan as outlined above.
Another alternative would be for your creditor to freeze the interest and allowing you to pay back an agreed minimal amount. They are likely to only offer this if you can demonstrate that you cannot pay.
9. Use a debt management company to administer your debts
If you have several debts to pay off and it's becoming increasing difficult to meet all the payments each month, you've looked at the above options, then you may want to talk to a debt management company(DMC).
A DMC will take all your debts and roll them into one large loan (debt consolidation loan) and then manage that debt on your behalf. You make one payment monthly the DMC and they then pay your creditors. There are pros and cons to using a DMC, so if you choose this route, be careful which company you go with.
10. Declare bankruptcy
If all else fails and you're really at loss, then you could consider bankruptcy. This is not for the faint hearted and should only be considered as a last resort. The aim of bankruptcy is to claim assets that can go towards paying off your creditors. The risk is that these assets may include your home or your car.
If you think bankruptcy is an option for you, then contact the National Debt Helpline for further advice.
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