There are a few ways to pay off debt and the best will depend on your circumstances. What’s certain, tried and tested NOT to work, is the “ostrich method.” This head in the sand, hope it’s going away technique has landed many people in trouble. So, learn from their mistakes, follow some of these straightforward points and you’ll be on the road to freedom from debt in no time. Stay positive though, it probably took you a while to get into debt and you need to acknowledge that it’s not going to disappear overnight.
Hold everything!
Freeze extraneous spending while you assess the extent of the problem. Cutting spending can come in many forms. It may mean passing on the purchase of costly items, or it may mean bringing a packed lunch to work rather than eating out. You’ll know the little luxuries that you could honestly do without. It’s not going to be fun but debt’s not much of a laugh either.
If at all possible, pay back more than the minimum.
This makes particular sense in the current climate of slashed interest rates. Instead of pocketing the extra cash freed up by lower mortgage repayments, for example, keep your monthly payment the same and pay it off quicker. Banks love it when you only pay the minimum because the longer you take to repay the charges, the more interest they make.
Consolidate your credit card debt.
Carefully review your credit card and store card interest rates. Prioritise the card with the highest interest rate and pay it off first. Where possible, switch your balance to a credit card that charges a lower rate of interest. If you’ve got space left on the card with the lowest rate of interest, transfer over the balance from the highest interest rate card. It may go against the first point but if circumstances call for it, pay the minimum amount due on all but one of your cards; the most expensive one. Channel the lion’s share of your repayments into that card, paying it off as quickly as possible. Once the balance on that card’s paid off, cut it up and move on to the next one with the same ruthless vigour. As the debt decreases, your repayment capital increases and the whole process accelerates towards debt freedom.
Consider Cashing up your savings.
Of course you don’t want to do this; it’s hard psychologically speaking. Cashing up your hard earned savings and using the proceeds to pay off debt that was, essentially, given to you for nothing, is hard to swallow. However, think about it logically. How much interest is your money earning in a savings account? What tax are you paying on those savings? Now, how much interest are you paying on your debt? The higher the interest rate on your debt, the more attractive repayment versus investment becomes.
How would your family feel about a loan?
No one else knows you as well, loves and trusts you as much as they do. So you may want to consider asking them for a short-term loan. Chances are they’ll offer you a much better rate of interest than anywhere else and are more approachable about late payments and unforeseen circumstances than bank managers and creditors too. It’s a good idea to have a written agreement though, especially if it’s a relationship that you want to preserve. So, clearly set out the rate of interest and repayment schedule, avoid any future misunderstandings and falling out.
Consider borrowing against your home.
A secured, debt consolidation loan may be an effective way for homeowners to borrow money at an affordable rate and reduce their outgoings into one monthly payment. This allows you to plan your repayment schedule with confidence. The repayment period may also be flexible and longer than with an unsecured loan.
This is important; you can lose your home if you fail to make payments. For more information or advice, talk to a debt management specialist.
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