Managing debt can be a stressful and challenging experience, especially when interest accumulates quickly. However, with a strategic and informed approach, it is possible to not only manage but also significantly reduce interest charges and accelerate the debt repayment process.
This guide presents several effective techniques to understand and organize your debts, negotiate lower interest rates, consolidate loans, make extra payments, and seek professional help when necessary.
Understand and organize your debts
The first thing to do in order to eliminate or at least minimize on the interest that you pay for the debts is to know exactly the outstanding balance that you have and to who you owe it.
The first thing that you need to do is to identify all the debts that you have, this could be credit card debts, personal loans, student loans and any other pending balances. It is recommended to write down the interest rates, minimum monthly payments, and the due dates for each of the debts.
Knowing your debts will enable you to differentiate the debts you need to pay first. Generally, it is recommended to concentrate on eliminating high-interest debt while leaving the low interest one.
This strategy is known as the avalanche method which assists in reducing the overall interest that is charged over time. Also, it helps avoid defaults which attract penalties and higher interest rates for the forgotten payment.
The snowball method is also rather efficient: here you start with the smallest debt and pay it off regardless of the interest rates on the other debts. This approach can be psychologically helpful since you will be getting some quick successes and be encouraged to keep eliminating your debts.
Negotiate lower interest rates
A somewhat ignored approach that could help you minimize interest expenses is to ask your creditors to decrease the interest rates. It is therefore quite shocking for many people to discover that creditors are often flexible and willing to listen to the debtor especially if the latter has a good payment history.
Inform your credit card companies and other creditors that you would like to negotiate for a lower interest rate. When bargaining, one should be in a position to defend why they should pay a low price.
Emphasize your punctuality of payments, your enhanced credit score, or any adverse economic conditions that you are going through. It is also recommended to check the interest rates offered by other lenders as you can use them to negotiate for a better rate.
If the credit card companies you owe money to will not let you decrease your interest rates, you should try to transfer the balances to a credit card with lower interest rates. Most credit card companies have a new customer offer of no interest on balance transfers for the first few months.
Consolidate your debts
Another useful approach for lowering the interest costs is debt consolidation. You can get one loan and pay off all the other debts that you have and at a lower interest rate thereby making the payment process easier and less costly.
This is because there are different ways through which one can manage to consolidate debts and some of the ways include; personal loans, home equity loans, and debt consolidation loans.
Debt consolidation is a popular reason for taking out a personal loan because the interest rates are generally lower than those of credit cards. A personal loan can be utilized to clear existing high interest debts and you are left with only one loan to fulfill.
Also, personal loans are characterized by fixed interest rates and certain repayment schedules, which makes it easier to plan for the monthly repayments. Home equity loans or lines of credit can also be taken to repay other debts in what is known as debt consolidation.
These types of loans are known to have lower interest rates because the loan is secured by your home. However, this presents a problem in that if you default on your payment then you stand to lose your home.
However, home equity should be used carefully for the purpose of debt consolidation because there are several risks involved as well as some advantages. Another way is to take a debt consolidation loan which is a loan especially provided for this purpose.
These loans entail taking several debts and paying them off using a new loan whose interest rate is comparatively lower. Several finance companies provide debt consolidation loans and some of them are more specific in working with individuals who have poor credit.
Make extra payments
Another great way to decrease the interest that you have to pay on your debts is to make additional payments whenever you can. This is because even if the additional payments are small they will help to cut down the principal balance and thus the interest charged.
If you are lucky to get some money that you were not anticipating to get like a tax refund or a bonus at your place of work, consider applying this money towards the clearance of some of your debt.
This can substantially lower the amount of the outstanding balance as well as the interest charged on it. Also, it is crucial to mention that many lenders do not put restrictions on the amount of extra payments you can make in a month.
The other way is to make your monthly payments a bit higher than the required amount. For instance, if the minimum amount that you are required to pay is $100, it is advisable to pay $120 or $150 at least.
This can lower the time it takes to pay off the loan and therefore, the total interest to be paid on the loan. To this end, it is recommended that you enroll for automatic payments for the new higher amount to avoid missing the deadlines.
Conclusion
Thus, it is possible to minimize the interest paid on the debts in the USA only with certain efforts and using several strategies. If you sort out your debts, get better interest rates, combine your debts, pay more than you owe or get help from a professional, you can get your financial life back on track.