Taking out a loan doesn’t imply that you have poor money management habits. People take out loans for various purposes, often after giving it much thought and consideration. Taking out a loan to pay tuition fees or finance the purchase of a home are some ways most people get into debt. Almost every person that you know might have taken out a loan at least once in their life. Despite how common taking out a loan is, many people struggle with repaying them. If you’re one of many trying to better manage and reduce debt, here are eight tips to get you on track.
8 Tips to Manage and Reduce your Debt
Track how much you owe
If you have multiple debts, your finances may be all over the place with the varying payment schedules and interest rates. Do yourself a favor and enlist all your outstanding amounts. Take note of every lending institution or creditor, the amount you owe them, and the monthly payment. Tracking your debt due dates helps you stay on top of payments and overall finances.
At this stage, you can also calculate a debt-to-income ratio. As the name suggests, this ratio tells what proportion of your income is spent on debt repayments. Divide the outstanding amount by your income and multiply it by 100. The percentage you get is the proportion of your income spent on debt repayments. Knowing this figure helps you budget personal expenses and debt repayments easily.
Understand your options
It’s tempting to avoid weighing out the pros and cons of each loan type and rush into deciding, only to find yourself in a financial sinkhole. An important decision is to choose between a secured or unsecured loan. You can get unsecured loans fast if you have a good credit score, so you don’t have to put up assets or securities as collateral for non-payment.
Similarly, debt consolidation loans are one way of repaying your outstanding debt. Instead of repaying multiple lenders, you must repay only one lender with a debt consolidation loan. It’s a loan to repay other loans that you have taken out.
Debt consolidation
Debt consolidation is when you take out a loan from a creditor like a bank to pay off all other loans. This way, you’re repaying to only one lender instead of multiple. Consider lenders offering the best interest rates to save money when looking to consolidate debt.
In most cases, a bank or lending institution might give you a lower interest rate for a debt consolidation loan. This interest rate might be lower than the ones your existing loans have, like your credit card.
Repay on time
The key to effectively managing your debt is to make payments on time. It’s better to pay off your debt as soon as the repayment cycle starts, or else you’ll have to pay an additional fee for late payments. Accumulating late payments becomes more challenging since you have a more significant amount to pay off and a higher interest rate, depending on your lender’s policies.
To remind yourself to pay on time, consider blocking time in your calendar as soon as the due date approaches. If using a digital organization system, set reminders for a week before the due date to help you prepare and structure your finances. Even if you unknowingly miss a payment, make sure to pay it off as soon as you remember to avoid penalties from the lender.
Pay the least you can afford to
Life is unpredictable, and due to unforeseen circumstances, you not be able to pay a monthly installment. Instead of avoiding repayment during the billing cycle, consider paying as much as possible. This will keep you on track in paying off your loans and prevents penalties and late fees.
It’s also more difficult to pay an accumulation of late payments on top of late fees, especially when you’re on a tight budget. Therefore, consider paying whatever you can for the cycle.
Build an emergency fund
Even if you’re knee-deep in debt, consider creating an emergency fund. Open up a savings account and start with whatever little contribution you can afford to make every month. You can start from $500 and work up to a few thousand dollars. The point here is to set aside money for emergencies or urgent expenses.
Rather than taking out another loan to finance an urgent home renovation or medical bill, you can use your emergency fund. Your emergency fund comes without any strings attached, and there are no interest rates or penalties you have to pay. It’s your own money, set aside for emergencies, so save for one and use it wisely.
Pay off high-interest debts first
Considering the “debt avalanche method,” we recommend paying off high-interest debts before you pay off the smaller loans or the ones with a low-interest rate. For instance, credit cards often have higher interest rates. So consider paying off your credit card bill before you move on to other smaller loan repayments.
Interest rates fluctuate depending on the economic situation and an annual basis. Therefore, paying off high-interest-rate-bearing loans first reduces the overall amount you owe in the long run. Use your list of debts mentioned in the first point to rank and prioritize repayment. Although some people prefer paying off smaller loans first for a slight boost of confidence, it is costly in the long run.
Seek Professional help
It’s okay to ask for help when you cannot figure out how to manage your debt. Financial advisors and lending institutions are there for a reason. If you need a loan, a financial expert can guide you on which loan best suits your financial situation.
You can seek professional help from financial advisors if you’re struggling to make ends meet along with debt repayment. From debt consolidation loans to debt settlement plans, they have a ton of services to offer. So don’t hesitate to ask for help in managing your debt.
Conclusion
Feeling frustrated is normal when you’re struggling to repay debt. However, there are plenty of ways to manage your money well. If you need to take out a loan, know that it’s okay to do so. You can effectively manage your debt repayment with the strategies mentioned above. Still, if debt management seems scary and a chaotic process, consider asking for help or advice from an expert.