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In the past, getting a personal loan from a bank or a credit institution is difficult because it requires documentation and a form of collateral. But, with the advent of modern technology, it only takes a few minutes to get a loan from your bank account or other sources. Today, there are several loan apps and online credit institutions that are readily available to give personal loans.
Credit card companies abound and they keep enticing you with their juicy offers especially if you have a good credit report. Financing schemes are available when you want to purchase household gadgets, or even for online shopping for everyday items. The interest rates are seemingly low and you can increase the loan amount as long as you maintain a good credit score.
Consequently, living a debt-free life is becoming increasingly difficult. Some people are already stuck in huge debts aggregated from different creditors and getting out of debt looks impossible. This leads to mental stress, frustration, and depression. Sadly, it is a leading cause of suicide.
In this article, we will enumerate the steps to take if you have found yourself in too much debt that you have become helpless. We will discuss approaches and lifestyles that will help in reducing the debts. Finally, we will look at the best forex trading course.
How do I Get Out of Debt: 5 Steps You Should Take to Get Out of Debt
#1. Assess Your Current Debts
Many debtors just toss away their monthly credit card bills and allow them to accumulate. The first step is to know how much you owe and how the debts piled up. Gather all your bills and write them out clearly. Sort out each debt, payments made, and outstanding debts including any interests. Calculate exactly how much you owe each creditor; check the interests and payment terms.
Next, assess your monthly expenses in comparison to your monthly income. How long will it take to offset the debts with your current repayment plan? Are you living above your means? Just answer any of the following questions to have an idea:
- Do you save money every month?
- Are you spending to impress?
- Do you have emergency funds in a savings account or cash?
- Do you borrow to support your lifestyle?
This list is not exhaustive; but if you are spending to impress an acquaintance, or to support your overall lifestyle, then you are living above your income. But, if you have debts from a student loan, self-improvement courses, or a mortgage, then, it is a good loan that will pay off in the long run.
#2. Make a Budget
A budget is a plan of how much you will earn and how much you will spend over a period of time. Managing debt requires a budget and since most bills are monthly, prepare a monthly budget for your expenses. Write down your income and write out all your monthly expenses.
At this stage, you do not have to cut off some fun like going out for dinner, buying a new dress, or taking the children out on weekends. What matters is that all expenses must come from the budget and must be accounted for. Also, if you have been practicing impulsive buying, budgeting will tame the habit.
Do not forget that this budget aims to pay off your debts and become debt-free. So, you must identify areas where you are wasting money and cut them off. Create a debt repayment plan and set a target for yourself.
#3. Track Your Spending
It is very important to track your expenses and know exactly how your hard-earned money is being spent daily. When expenses are tracked, you can be able to work with your budget and avoid the habits that got you into debt. One of the easiest ways of doing this is to keep all your receipts and periodically review them.
First, list out all the expenses made within a month or any frequency you choose. Arrange the expenses into categories like groceries, transportation, entertainment, utility bills, rent, etc. Calculate the average monthly expense for each category for the last few months. Then, add the total expenses and compare them to your income.
Another way of tracking your spending is through mobile apps. Several mobile apps can help you with budgeting, expense tracking, and comprehensive reporting like Intuit Quickbooks. It has the advantage of doing all the calculations and plotting expense charts and reports for you. But, you must not forget to manually enter your cash expenses, bill payments, grocery purchases, etc before it can do the calculations.
#4. Earn more Money
One of the effective ways of getting out of debt is to find a way to increase your income. The major reason why you are neck-deep in debt is that you cannot afford your expenses. Who needs auto loans when he can pay outrightly? You may follow any of the following ways to earn more money:
Getting another job: People change jobs or even careers all the time. You can start by actively looking for higher-paying jobs with the same qualifications. Sometimes, you may just require an extra certification to qualify for a higher-paying job. The key is to constantly search for jobs and think of what to do to earn more and pay off your debt faster.
Get a second job: Since you want to pay off your debt faster, you may decide to raise more funds by taking up a weekend or part-time job. You may work in a restaurant, or nightclub, drive a cab, etc on a part-time basis.
Adding a part-time business: There are many online and offline businesses that you can add to boost your monthly income. You can learn new skills and market them online. For example; you can learn how to design flyers, logos, and banners and sell your skills online. You can take up online part-time jobs, start a blog, become an affiliate marketer, online tutor, freelancer, etc.
#5. Change Debt Enabling Habits
From your debt assessment, budget, and expense tracking, you must have noticed why you are in debt as well as some habits that are responsible. Now that you are desperate to live a debt-free life, it is time to do away with those habits or replace them with cheaper alternatives.
For example; you can:
- Watch live sports or entertainment shows on TV instead of buying tickets and transporting yourself to the venue. Though watching at home is less fun, you have a target and must work it out.
- Cancel a gym membership and jog on the streets. Embarrassing? Yes, but look around, chances are that others are doing it and with time, you will be fine. Else, you can work out at home, remember you need to save money and pay those debts.
- Cook at home instead of frequent meals at fancy restaurants.
- Limit your visits to the Cinema and malls where you are likely to face temptations to buy designer shoes, watches, and clothes on display.
- If your house rent is high, you may consider moving into a smaller apartment to reduce the bills on rent.
You are in the best position to know your habits and the frequent expenses that can be reduced. So, the examples above may not apply to your case but the general message is that changing your habits can significantly reduce your expenses. So, more funds can go into the monthly payment of debts.
5 Ways To Lower Your Debt
#1. Refinancing
Refinancing a debt means obtaining a new loan to pay off an old one. Here, the primary aim is to lower the interest rate on the existing loan. So, by getting a new loan with better payment conditions, you are likely to save some money on monthly interests and possibly clear the debt faster.
You may consider refinancing a mortgage for other reasons like shortening the repayment period or raising funds for an emergency through home equity. But, it comes with the same initial costs such as application fees, title search, etc. So, do your research very well to determine if refinancing is a wise choice for you.
Refinancing comes in handy if you are struggling to pay off a mortgage or student loan because you may get lower interest rates and ultimately reduced monthly bills. But, auto loan refinancing comes with some eligibility conditions like age of the car, mileage, etc.
#2. Consolidation
Assuming that you have several debts from various sources such as private student loans, mortgages, home equity loans, credit card balances, car loans, etc; you can consolidate your debts by taking a single personal loan to pay off all the others. So, multiple loans are replaced by one big debt with better payment conditions and from one source. It is important to look for cheaper interest rates when consolidating your debts.
Debt Consolidation replaces multiple payments, multiple charges, and interests on different platforms with a single payment that comes at a lower interest rate. You can apply for a debt consolidation loan if you have a good relationship and payment history with your financial institution.
Note that consolidation may not reduce or erase your debt; rather it transfers them to a single creditor. The idea is that you may negotiate better payment terms since the amount is bigger and the repayment time should be longer.
Consolidating credit card debts can easily be done by obtaining a balance transfer card which comes with lower interest fees. The old credit card balances are transferred to the new card.
#3. Renegotiating Terms
Debt negotiation is the process of debt settlement with a creditor whereby he agrees to write off a substantial part of the debt. The debtor now pays the remaining balance as a lump sum or in installments as agreed during the negotiation process.
Depending on the type of loan or debt, you may reduce your debt by asking for interest reductions or renegotiating the payment terms with your creditor. This is especially possible with credit card companies where you have maintained a good repayment history. You may do it on your own, hire a lawyer or a debt settlement company to renegotiate your debts on your behalf.
One problem with this method is that the creditor may sue the debtor if he initiates a renegotiation without filing for bankruptcy. Also, your credit score might be negatively affected. Credit scores are figures used to rate an individual’s creditworthiness. It is obtained from credit bureaus; which are agencies that collate individual account information, credit history, etc, and sell it to third-party companies.
#4. Snowball vs Avalanche Approach
Debt snowball method is a repayment method in which the debtor lists all his debts according to size and starts paying them off starting with the smallest. He first allocates funds enough to cover the minimum payments on all debts and extra repayment funds. Then, every month, he pays the minimum on all other debts but uses the remaining funds to pay for the smallest debt.
‘Snowball’ approach gives a sense of joy and fulfillment once each small debt is paid in full. Psychologically, it stirs up hope and courage in the debtor. Also, more repayment funds will now be available to offset the next small debt sooner than expected.
‘Debt avalanche’ is a repayment plan in which the debtor makes the minimum monthly payment on each of his debts but uses the remaining repayment funds to pay for the debt with the highest interest rate. This continues until the debt is paid off and the next high-interest debt starts receiving the greatest amount until it is paid off. Debt avalanche significantly reduces the debts because there are huge savings on interests.
No matter the debt repayment option you choose, the important advantage is that the repayment period and amount are significantly reduced. Sticking to a plan often requires commitments and discipline.
#5. Pay Down Your Credit Cards
A Credit card is a convenient payment tool that can be used for daily purchases of goods and services. It also comes to the rescue when we are confronted with some huge expenses like a vacation package, a new electronic gadget, etc. With a credit card, the temptation to keep buying to pay later is almost irresistible. But, eventually, the debts and interests pile up and later cuts deep into your paycheck.
If you take some time to analyze credit card statements, you will discover that the interest rates are very high. For example: if you have a credit card debt of about $3,000 and decide to dump the card without further purchases. Then, you make only the minimum payment on time without any late fees; it will take around 14 years to pay off the debt. Then, you would have paid over $6,000.
But, if you can increase monthly payments, you will significantly reduce the payment duration and total amount that will be paid. This information is found on most credit card statements. So, a good debt reduction strategy is to pay down your credit card balance and not just the minimum monthly bills. Having to make monthly payments for decades is like being in a financial prison and nobody likes that.
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Conclusion: How do I Get Out of Debt
Modern technology has made it easy for anyone to access credit facilities from multiple sources. If you find yourself sinking in debt, do not panic; follow our recommendations.
Make a list of your creditors and check how much you owe each one of them. This will help you calculate the repayment possibility and the length of the repayment period. Create a budget that includes all your income and expenses with the aim of accountability. Find a way to track every money spent; you can do it manually or use a mobile app.
Next, find a way to increase your income by looking for another job, adding a second job, or starting a part-time business. Identify those habits that lead to excessive spending and replace them with cost-effective alternatives.
You can lower your debts by refinancing the loan; getting a fresh loan at a lower interest rate to pay off the old one. Consolidation means obtaining a single loan to clear all the other loans leaving you with a single debt and a creditor. It is a good way to reduce your debt since it usually comes with better payment terms. Sometimes, you can renegotiate your debts with your creditors to get a better deal.
You can adopt the Debt avalanche repayment method which pays off the high-interest fee debts first or the Debt Snowball method which is paying off the smallest debts first. Credit cards come with high monthly interest and it is better to pay them off because you will save a lot of money thereby reducing your debts.
So, no matter your financial situation, there is a solution and an approach that can be of help.
FAQs
How do I get out of debt with no money?
You can start by organizing yourself, and checking how much you owe. Then, ask your creditors for discounts, try consolidating your debts, or refinancing as the case may be. Use the snowball or avalanche methods to reduce your debts. Look for ways to earn more and cut off some spending habits.
What is the easiest way to get out of debt?
- Find out how much you owe
- Make a budget
- Make efforts to reduce your debts.
- Create a plan for repayment
- Increase your income and cut out expensive habits.
- Adopt a repayment strategy