Types of Debt Repayment

Paying off debt is the goal of many people, but at times, the task may seem insurmountable. You can choose from different types of debt repayment plans based on your personal finances and the ability to pay. Your goal should be to pay off debts as quickly as possible to pay the least amount of interest on the loans.

Debt Snowballing

In the debt-snowballing method, made famous by Dave Ramsey, you list all of your debts in order from highest interest rate to lowest. From there, you make the minimum monthly payment on all debts except for the one with the highest interest rate, which you pay as much toward as possible. When you've finished paying off that debt, you then take all of the money that you were paying toward that debt and apply it toward the debt with the next-highest interest rate until you have paid off all debts.

Debt Laddering

Debt laddering is similar to the debt snowball, except that you put your debts in order from the largest amount owed to the smallest. You then pay the minimum amount on all debts except for the smallest one, which you apply as much money toward as you can. Once this is paid off, you use that money for the next-smallest one. In the debt laddering method, you may end up paying a higher total amount--due to the interest--but many feel motivated by getting rid of one or more debts more quickly.

Debt Consolidation

In a debt consolidation, you take out one large loan and then use that loan to pay off all the smaller loans. This leaves you with just one monthly loan to pay. Many people do this through a home equity loan. This helps you to make timely payments--as you may forget a payment when you have several loans that you're juggling--and it often enables you to decrease the interest rate on the loans that you're paying, reducing the overall costs.

Debt Settlement

When you're struggling to make your debt payments, debt settlement may be a solution. In this, the creditor agrees to settle your debt for 20 to 75 percent of what you owe. This may seem like an ideal solution, but you should note that the company may report this to the IRS, which can cause the forgiven amount to count as income when you file taxes. Depending on the amount that was forgiven, you could end up paying a lot in taxes.