A debt can lead to many problems, such as insufficient savings, nonpayment of utility bills, inability to cope with monthly expenses, unaffordability of standard healthcare, and much more. According to a report, in 2015, more than half of New Zealanders above the age of 15 years were in debt. Living in debt can be brutal and challenging for many reasons. You cannot save for an emergency or make investments for your future.
However, you can repay your debt with the right mindset and practical tips. The first step is to realize the depth of your debt problem and how much you are stuck in it because the strategy depends on your financial situation and goals. You can start the journey by following the tips mentioned below.
- Debt consolidation loan
Simply put, a debt consolidation loan is like a new loan to repay existing loans. How is it viable to take new debt to repay the old debt? Well, it is one of the features of a debt consolidation loan. When you are buried under multiple loans with varying interest rates and payback periods, it can help you manage all your debt under one umbrella.
You must match the lender’s requirements to qualify for a debt consolidation loan. Several international companies offer these loans across the globe, but if you are a resident of New Zealand, then look up quick approval debt consolidation loan NZ to make a well-informed decision. They require basic information only, like proof of income and employment. After the verification process is successful, you can receive this loan.
Once approved, instead of worrying about multiple debts, you now have a single liability. Some of the benefits include:
- Lower interest rate
- Single monthly amount
- Increased credit score
Review your progress frequently and check whether you are improving your spending behavior and achieving financial goals.
- Money management
Budgeting is the key aspect of paying off debt. It is vital to make the most of the resources and use them strategically. Review and redo your monthly budget and find ways of paying a little extra toward your debt. It is because interest rates on mortgages, auto loans, or even student loans are rising. Therefore, paying more will save you on interest.
You can manage the budget by dividing it into three parts. Consider setting aside 50% of your income for essentials, 30% for leisure, and the remaining for debt repayments. So, cutting off leisure activities and using that money for paying extra money can reduce your debt much faster.
After budgeting your expenses, automate maximum payments and monitor them. It will free up your mind and help you look for other ways to pay off debt, like selling items for cash or finding a side gig for extra income.
- Snowball and avalanche methods
Another effective way of reducing your debt is the debt snowball method. It is an appropriate method when you are already paying higher than required. In this method, you pay the minimum on all your debts except the smallest loan, which you must pay as much as possible. It is called the snowball effect, where you eliminate the smallest debt first and then move on to the next smallest loan while maintaining the payments on the rest of the loans.
For example, you have three debts; an auto loan of $4000, a credit card balance of $3400, and a personal loan of $20,000. Your priority will be to pay off your credit card balance, which is the lowest, and then auto loan.
Along with lowering the burden of debts, this method keeps you motivated. It builds momentum toward getting you out of debt. On the contrary, the avalanche method suggests you pay off debt with higher interest rates first. Once it is paid, you then pay the loan with the next highest interest. The aim is to save on loans with high-interest rates in the long run, as they are expensive to carry on.
You can start by listing all your outstanding balances, arranging them, and allocating funds. Further, automate the payments to protect yourself from deviating from the plan.
- Negotiate the current terms
It may sound impossible, but this method works well. You will be surprised to see how willing creditors are to negotiate based on your positive record. If you have a good history of timely payments and have maintained a friendly relationship, you are in a position to qualify for better debt repayment terms.
One way is to negotiate lower rates and save on interest payments over the years. On the other hand, the ideal outcome is to pay less than what you owe. It is possible to agree on terms with creditors, make a wholesome payment once, and get out of debt. You can either do it yourself or take third-party assistance.
However, there are risks associated with early settlement. During your ongoing negotiations, you may not make any repayment. As a result, it would adversely affect your credit score.
- Use windfall to pay the debt
In addition to student loans and mortgages, windfalls can ease the burden of substantial ongoing obligations. It refers to a stimulus check or tax refund. Use that money to pay your debt instead of saving or spending it carelessly.
It is critical to use available financial resources wisely and get the most out of them. Another way is to split the windfall into two parts, one for paying the debt and another for creating an asset.
Consequently, the asset will give a return on investment that you can use for debt repayments and eventually leave the vicious debt cycle behind. Other windfall examples include work bonuses, inheritance, or cash gifts. For desired results, your sole objective must be to use extra money to pay off debt.
A debt-ridden situation can hinder your personal growth and negatively affect the quality of your life. It takes effort and the right strategy to pay off the debt completely. Debt consolidation loans, money management, snowball, and avalanche methods, negotiating the current terms, and using the windfall to pay the debt are some tips for achieving financial stability and improving your spending behaviors. When you have paid off your balances, remember why you got into debt in the first place and modify your behavior to prevent yourself from repeating the same cycle.