Ever noticed how your debts seem to accumulate more debts? As the debts grow larger they gain momentum and even if you are paying them down it may begin to feel like you’re not really gaining headway on them.
Understanding what type of debt you have
There are different ways to deal with different type of debts. But first it’s good to know what category your debt falls into?
- Secured debt: utilises a form of collateral, like a house or car
- Unsecured debt: has no collateral, examples, credit cards or personal loans
- Fixed interest rate debt: has the same interest rate for the entire timeline of the loan, like some mortgages
- Variable interest rate debt: the interest rate may change over the life of the loan, like credit cards
- Fixed payment term: the loan is set to be paid off by a certain date, like some mortgages or student loans. The interest charged is higher at the beginning and as the principal is paid off, interest decreases.
- Variable repayment period: There is no set date by when the debt must be repaid, like credit cards
You may have a one or all of these kinds of debts. Understanding which ones to pay off with the different methods available to you can mean that you are able to stop unnecessary worrying about the debts that just need to tick over, paying down over a fixed time frame (secured debts), and focus your attention towards the ones that can be worked down faster.
Unsecured debt pay down strategies
An important concept to remember is you should pay more than the minimum to work your debts down to a zero balance. This works well for unsecured debts i.e. the credit cards. Using the Debt Snowball pay down strategy, every spare dollar you have is concentrated into paying down the debt with the lowest balance first, but you still pay the minimum payment on ALL your debts. This method doesn’t take into consideration the interest rate, but it works because it rewards you with small successes. The Debt Stacking method takes into account interest rates to determine which debt to pay down first . The best method to choose is the one that you can stick to.
Supported pay down strategies available to you
Although self managed pay down strategies work. Many people still find the issue is not the debt repayment strategy chosen but the fact that they do not have enough income to meet their debt repayments. If this is your scenario then it is best to explore your options for paying off your debt with some longer term supported strategies.
Options that are available to you include negotiating informal arrangements with your Creditors or looking at the option of a Debt Agreement. Debt Cutter have assisted clients to negotiate informal arrangements to assist them in the short term to find their feet and helped many thousands of Australians completely resolve their debt problems though the use of a debt agreement. With a debt agreement secured debts are paid in the normal way but all unsecured debts repayments are renegotiated, often reducing the total debt owed, freezing the interest and consolidating unsecured debt payments into one regular payment. In this scenario, clients maintain complete control of their finances but their whole repayment process is simplified together with gaining the support of a dedicated team in paying down their debts.
If you’re facing financial hardship we are here to talk about a solution. Call us on 1300 887 211 or Book a Free No Obligation Phone Consultation with our friendly team and we can discuss debt management options specially focused on your personal situation.
If you have a debt reduction strategy you’d like to share with us please add it to the comments box below.