9 Tips to Make Your Debt Repayment Easier

Debt Solutions

9 Tips to Make Your Debt Repayment Easier

According to statistics, the average credit card debt of a U.S. household is over $15,000, and ignoring it or wishing it away just doesn’t work. With the high interest rates compounding what you already owe, it’s time to get a serious strategy in place for debt repayment!

Here are 9 effective strategies to consider:

Don’t Opt for Minimum Payment

Credit card companies and lending institutions make money off the interest on your dues. Make a few lifestyle changes and give up some luxuries so you can pay two or three times the minimum monthly dues and make a real dent in your debt.

When you pay only the minimum (typically 2%-3% of the total outstanding balance), you’ll end up with hundreds (or even thousands) of dollars added to your existing debt over time!

Prioritize Your Debt Payments

Thoroughly analyze your debt to understand which is the most expensive, in terms of interest and late payment charges. Make it a priority to pay these dues off first, and look into the option of transferring them to lower-interest credit cards or loans.

This strategy is commonly known as “snowballing” your debt. Focus on paying back the most expensive debt first, while the low-interest ones don’t eat into your income as heavily during that time.

Get Help from Friends and Family

No one enjoys being in the position of asking loved ones for money, but it might be the best way to get out of debt fast. If your loved ones are financially comfortable, approaching them for a loan may not be as painful as you might expect it to be.

A written agreement outlining the terms, payment schedule and interest can help set them at ease. Of course, you need to make sure you’re repaying them on time, as promised!

Use Your Life Insurance

This strategy only works if you have a whole life insurance policy that accumulates a cash value which you can borrow against. Why would you want to do that? Well, the interest rates are usually much lower than bank or credit card loans, and there’s no set time limit on repayment.

However, if you die before paying back the loan, your beneficiaries will not receive the full death benefit (the loan amount and interest will be deducted from the payout).

Put Savings and Investments to Use

It may seem like your savings account or investment portfolio is helping you make the money you need to pay off your debt, but it probably isn’t. For instance, if you pay 12% interest on your credit card, your investments would need to grow at over 18% after tax payments (which rarely happen).

Paying off high-interest debt with your savings amounts to the same financial gain, without the inherent risk involved in high-interest investments.

Consider an HEL (Home Equity Loan)

If you are a homeowner with accumulated equity as a result of mortgage repayments, an HEL can help with your debt. Since this line of credit has very low interest (generally 6%-7%), you can use it to snowball your debt and reduce the interest burden.

The interest on HELs is also normally tax deductible, so your effective interest rate will be even lower. Just make sure you don’t run up your credit again, at least till the loan is repaid!

Take a Loan on Your 401(k)

If you have a 401(k) plan at work, you can borrow up to half of the total value of funds in the account, or $50,000 (whichever is lower). Basically, you’ll be taking a loan against your own money, since the interest you pay on a 401(k) loan (which is lower than credit card rates) goes right back into the account.

However, despite paying the loan amount and interest with after-tax dollars, interest withdrawals in the future will be taxed again. The loan needs to be repaid within 5 years or if you leave your current employment, otherwise it’s treated as a taxable distribution and may incur a 10% early withdrawal penalty too!

Negotiate Your Repayment Terms

If you have no other options, speak to your creditors before you decide to declare bankruptcy. Most creditors will be unwilling to push you into taking such a drastic step, especially since they may not receive much in case you do so.

Explain your willingness to repay the debt and ask for a new repayment schedule, lower interest rate and any other leeway they can give you. It’s worth trying, at least, and there are various organizations that can help you with this.

File for Bankruptcy

If there is absolutely no other way out of debt, bankruptcy may be the only option left to you. However, it will affect your future credit (bankruptcy stays on credit records for 10 years) and you’ll still have to come up with money for an attorney, court filing fees and other legal expenses.

Personal bankruptcy laws under Chapter 7 and Chapter 13 have gotten very strict, so you may not be able to get full relief. It’s best to consult a financial advisor before you decide to take this step.