Because having debt puts the stability of your finances at risk, you should eradicate at least some of the debt you have. Multiple approaches to debt elimination exist, with each one having benefits and disadvantages. Although each of the methods available for debt elimination are different, they all work by addressing creditors and directing your funds in an organized way.
Basic Negotiation
Many creditors and lenders provide lower interest rates, modify your minimum payment amount or arrange a payment plan for you if you just ask. This can save you money in interest and make your cash flow more manageable.
Refinancing and Consolidation
Some people use refinancing to eliminate debt related to homes, vehicles and other property. This involves taking out a loan and using the funds to pay off the original loan. Usually, this saves money through better interest rates, or the new lender extends your loan period so your monthly payments are lower.
Related to refinancing is debt consolidation. With debt consolidation, you take out a new loan to pay off some or all of your debts -- the debts don't have to be related to property and often include multiple credit cards. In most cases, you can reduce the interest you pay on at least some of the debts you consolidate. Once you consolidate, you have to pay back only one lender, making it easier to track repayment.
Debt Settlement Versus Debt Management
Debt settlement is a specific type of negotiation by which you ask your creditors to forgive some of what you owe. You use this option when it is highly unlikely you can pay off the total balance. With debt management, you hire a company to act as a middle man between you and your creditors and lenders. You give the money you'd use to pay your debt to the company, and unless the company is nonprofit, they redistribute it to your creditors for a fee. They also negotiate for better interest, payment plans and forgiveness of some of your balance. This is a good option for people who are overwhelmed handling debt alone.
Methods of Repayment
The debt elimination method financial experts most often recommend is to rank your debts according to the rate of interest and to pay as much as you can on the debt with the highest interest rate. You pay at least the minimum on all other debts. You save the most money with this method. The alternative is to pay your debts off starting with the lowest balance. This may cost you more, but you get the psychological boost of paying off debts fast. The last approach, which is the least logical from the savings and math standpoint, is to eliminate debt randomly. For example, you might pay off a debt simply because you got a work bonus of roughly the amount of your debt balance.
Bankruptcy
The last option to eliminate debt is to declare bankruptcy. This essentially voids whatever eligible debts you have, but it's a major ding to your credit rating.
Consideration, Budgeting and Expense Tracking
Eliminating debt takes time. You likely will make a few mistakes along the way, and life circumstances like job loss may slow your debt elimination. Don't let this deter you. Lastly, consider your personality, debt amount and credit score when choosing an elimination method. Not all methods work for everyone, and some, like bankruptcy, hurt your credit. No matter what debt elimination option and repayment method you use, your success depends on your ability to create a budget -- and stick to it -- and to track what you are spending. If you don't know what you have available, it's more likely you'll overspend and acquire debt again.
0 comments:
Post a Comment