Which debts should I settle off first?
You’re not alone if you find yourself immersed in overwhelming debts. It has been estimated that an average American owes nearly $4000 of the credit card balance. And this estimate is exclusive of other sources, such as homeowner, auto, or student loans. That’s the reason why most Americans aim to reduce their arrears in 2021. But the simple question is: how to settle the enormous debts?
There are several different approaches for repayment of loans, each having its own advantages & limitations. However, if you agree to develop positive habits regarding your finances, it’s pretty easy to attain financial freedom. You can initiate the process by deciding the bills you need to pay off first, determining the structure to use & exploring the other options.
How much amount do you actually owe?
Prior to deciding the loans that you’ll settle first, you’ll need to have details about the amount owed, the minimum payments that you’ll have to make, and the rate of interest. You’ll find this information on your monthly statement. Once you have this information in hand, it will be easy for you to decide the monthly payments & the total balance. Also, based on the total amount, you can choose the pay-off strategy.
Analyze the payment methods
After you’re done prioritizing your dues, you must then decide on how to pay them off. There are two most effective strategies- “debt avalanche” and “debt snowball.” Let’s discuss these methods:
- Debt Avalanche
In this method, the arrears with high-interest rates are prioritized first to minimize the interest amount. You continue to make minimum monthly payments, but the extra money will be used to settle the highest interest rate loan. Although this method works best to reduce your interest, it might take a longer time to settle your obligations.
- Debt Snowball
This method involves prioritizing the loans that have a small amount of outstanding balance and settle them off. You’ll still have to make monthly payments, but the extra amount will be directed towards the payment of the smallest balance for a faster pay-off.
Consolidate your debts
If you’re unable to choose which unsecured bills to pay on a priority basis, you have the option of consolidating them into a single payment. Balance transfer & home equity loans are the best ways to combine your bills. In this section, we’ll discuss them in brief.
- Balance transfer
Your multiple credit card loans are placed on a single card at a low-interest rate in a balance transfer. The rate of interest may vary according to the amount you owe.
- Home equity loan
It’s the best way to combine high-interest loans through the homeowner’s equity.
For instance, if you owe a mortgage of $ 1, 00,000 & the valuation of your house stands at $ 2, 00,000, then the equity worth $ 1 00,000 can be used as a home equity loan to repay your bills. However, you can lose your home if you miss out on the payments.
Get help to pay off debts faster
There are several approaches to prioritize your over dues & get rid of them at once. If you cannot decide which outstanding amount to settle off first, you can seek debt advice to get a better idea of how to settle your debts. We’ll assist you in finding the best advisors to help you save money & gain financial freedom.