Having a lot of high-interest consumer debt can be like an anchor holding you down from being able to pursue your financial dreams. Sometimes, debt is the result of poor financial choices, like overspending on a credit card. But often, debt is unavoidable, like having to use a personal loan or credit card to pay for necessary car repairs or a medical bill.
No matter the source of debt, several repayment strategies can help you get your finances under control and allow you to start dreaming again. From the debt snowball to debt consolidation loans, we’ll cover five debt repayment strategies and walk you through choosing which is best for you.
Your first step to get out of debt
Before you dive in and choose a debt repayment strategy, it’s important to outline each of your debts to get a comprehensive picture of what you owe. Create a list of debts that outlines the following details:
- Type of debt (credit card, personal loan, etc.)
- Balance due
- Interest rate
- Monthly payment
- Lender
- Number of remaining payments on the current schedule
Once you understand how much debt you have, you can confidently begin exploring the following options for repayment.
Debt snowball
The debt snowball is a popular payoff approach that has you prioritize your debt from the smallest balance to the largest. You’ll make minimum payments on all debts and funnel any extra money toward the smallest debt. The idea behind the debt snowball is that you’ll be able to quickly pay off the first debt, instilling confidence that will keep you motivated.
Once the first debt is paid, you’ll take whatever you were paying toward the first debt and apply it to the second one, then repeat the pattern until all of your debts are cleared. Depending on how much debt you have, it may take years to wipe out your debt completely. But celebrating small victories along the way can help you stay on track.
Debt avalanche
The debt avalanche focuses on the interest rate of your debts and has you prioritize repaying the debt with the highest interest rate. You’ll make minimum payments on all debts and allocate extra funds toward the highest-interest debt. The idea behind the debt avalanche is that you’ll save the most money over time by targeting the higher-interest debts first.
The avalanche method of debt repayment can be incredibly effective if you’re driven by maximizing interest savings over time. You can use online calculators to determine exactly how much you’ll save by prioritizing each debt. Then, allow that number to motivate you to stay the course until all debts are repaid.
Debt consolidation loans
A debt consolidation loan is a personal loan that can be used to combine several high-interest debts. With debt consolidation, you’ll apply for a new loan and then use that loan to pay off other lenders. Then, you’ll be left to manage only a single monthly payment, often with a fixed interest rate, making it predictable and easy to fit into your budget.
Debt consolidation can be an effective approach for people who are committed to changing the financial habits that got them into debt in the first place. If you’re ready to pay off debt aggressively, debt consolidation makes it easy to pour all of your efforts into paying off a single loan instead of trying to manage several payments each month.
Debt management plan
A debt management plan (DMP) is an approach to debt repayment in which you’ll leverage the expertise of a credit counseling agency to support you. With a DMP, you’ll work alongside a non-profit credit counselor who will assess your current debt burden, negotiate with creditors on your behalf, collect payments, and ensure creditors are paid according to the agreed-upon plan.
A DMP allows you to focus on making money to cover your monthly debt payments without the stress of having to manage those payments or face calls from lenders. In exchange for running the plan, you may pay a nominal fee to the credit counseling agency. However, those fees are often more than made up with the amount you could save on interest.
Bankruptcy
Bankruptcy is a last resort option that can clear certain types of debt if you qualify. There are different types of bankruptcy, with Chapter 7 and Chapter 13 being the two most commonly used by individuals. Chapter 7 bankruptcy liquidates and forgives certain types of unsecured debt, like credit cards, medical bills, and personal loans. Chapter 13 bankruptcy reorganizes your debt and allows you to continue to make payments to creditors over three to five years.
Filing for bankruptcy can damage your credit score and make it difficult to borrow money in the future as it stays on your credit report for seven or more years, depending on the type. If you’re considering bankruptcy, it’s important to first meet with a bankruptcy lawyer or other financial professional who can explain the process in full and share the pros and cons.
Eliminating your debt
The best debt repayment strategy is the one you’ll stick to for months or years until your debt is repaid. That means it’s important to understand your underlying motivations and financial habits as you consider options. Someone who thrives with small wins might benefit from the debt snowball, while someone who tends to be more scattered with their finances could benefit from debt consolidation and only having to pay one loan each month. No matter which option you choose, you can look forward to when your debt is fully paid and daydream about how you’ll shift money toward other financial goals in the future.