Debt

How to Decide What Debt-repaying Strategy Works Best For You?

  

Repaying loans, credit card debt, and other forms of financing is always difficult. While a single loan may not usually be enough to put a considerable amount of stress on an individual’s finances, things tend to get more complicated when one has to repay several forms of debt at the same time. This is especially true for those who have taken out variable rate loans that make it difficult to predict how much or how little they will have to pay in the long run.

There are several strategies that borrowers may use to repay their debt easier. However, which one they choose can be extremely important. One can budget one’s income, refinance a loan, get a debt consolidation loan, or take out a mortgage to repay the debt. Each of these strategies is viable, however, different scenarios require specific strategies and choosing the wrong one can further aggravate things.

This having been said, here is what you need to keep in mind when deciding how it is best to repay your debt:

Establish What Debt You Have to Repay

The first thing that all individuals should do is to write down all the debt that they need to repay. Keep in mind that some forms of debt need to be repaid in instalments while others have a set final term that marks the date by which all the money should be repaid.

This list will help borrowers put their current financial status into perspective. Once you’ve created the list, look at how much money must be repaid per month and subtract it from your income. Ideally, the total of the monthly payments that you make should be less than 30% of your income. If the sum is smaller, then the debt shouldn’t be an issue, however, if it is larger, it may be time to look at how you can reduce the cost of the debt or spread the repayments across more months/years.

Priorities Your Most Expensive Loans and Determine Their Total Cost

The next step is to divide the list in two. One side, write the most expensive forms of debt. These will have to be repaid as soon as possible, especially if they do not have an early repayment fee. The other side should contain all the smaller loans and forms of debt, such as low-interest personal loans.

What Kind of Interest Rate Is Attached to It?

Look at what variable-rate loans you are currently repaying. These will always prevent you from creating an accurate monthly expense budget because the size of the instalments may change depending on various economic factors. Variable interest rate loans should be refinanced or consolidated into fixed-rate ones, making them safer.

Establish If Your Credit Rating Would Be Enough for Refinancing or Debt Consolidation

When deciding what strategy to use, take into account that some courses of action, such as getting a debt consolidation loan, may require a high credit rating. Always choose your repayment strategies depending on your credit rating. Some methods may reduce your score, such as pushing to repay a loan early or having it refinanced while still at the beginning of its term. Other strategies, such as getting a debt consolidation loan may be completely inaccessible to you if your credit score is too low or do not meet other requirements.

Consider How the Situation May Evolve Over Time

Always look at the bigger picture. Even though a loan may have low monthly repayments, it can be difficult to repay if it has a long repayment term or a variable interest rate.

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