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Debt is not all bad. In fact, if used intelligently and productively, it has the power to create significant wealth for you; but if it is allowed to run away, it can really bring you down to a level that you will find difficult to bring yourself up from. For most of us laymen, the second scenario is more likely than the first one, hence it is always advisable to keep debt at a minimum.
A Debt can be a substantial financial burden and overwhelming if not managed properly. Whether it’s a home loan, credit card debt, car loan finance, personal loan or a combination of many debts, dealing with it is not easy but with a financial understanding and wise decisions, you can make it easier.
Debt Consolidation loan is a strategy available to help you; let’s take a look and figure out which one is right for you.
Understanding debt
Debts are different in nature, and that’s why there is no one surefire way to reduce all your debts. What works for one might not work for the other.
When you have too many separate debts to manage your repayments can get complicated. It is advisable to organise your debt calendar and work out all of the different lenders you owe money to, how much money you still owe, what you are paying in interest, and how much your repayments are. This way, you will get a realistic amount which you’re putting towards your debts each month.
Now you should identify the lenders with the highest interest rates and fees. For instance, you might have a couple of credit cards with higher interest rates than the others, or you may be paying more in unsecured personal loan fees and interest than you are for a personal loan for car.
By understanding your debts, you can decide on the right strategy to manage them. No matter how many separate debts you have to how many lenders, several debt reduction strategies can help you control your repayments and better manage your debt.
Snowfall Method of Debt Reduction
The basis of the snowfall method is ‘start small and get larger’. The premise is simple: start by paying off the smallest debt first, then work up to the larger ones.
To get started, make a list of all your debts in ascending order of amount to pay. Ignore the interest rate unless two amounts are the same. In case the same amount of any two debts pay off the debt with the highest interest rate first.
Once you’ve made your list, repay the smallest amount as much as you can afford each month until it is completely repaid and make the minimum repayment on all other debts. After the smallest amount is repaid, you can then move on to the next amount on your list.
Pros of snowball method:
- The good thing about the snowfall method is its ability to let you start repaying your debts one small step at a time You will feel more confident once you will start managing your finances, and your financial skills will grow, and you may be able to gather the momentum to pay all your debt quickly.
Cons of snowball method:
- The snowfall method is not always cost-effective because it focuses on the amount rather than interest. Sometimes repaying the amount with the highest interest rate first is the best place to start.
Debt Avalanche Method
It is similar to the snowfall method but rather than listing debts in order from the smallest to the largest amount, this method involves listing your debts from the highest interest rate to the lowest interest rate.
In this method, you don’t worry about the principal amount unless the interest rates on two debts are the same, in which case we pay off the higher amount first.
Pay the minimum amount on all your debts except the one with the highest interest rate. For the amount with the highest interest rate, pay as much as you can afford each month until fully repaid and then move on to the next amount on your list.
Pros of the avalanche method:
- The avalanche method is most of the time a wise choice when selecting a debt reduction strategy because it’s a more cost-effective way to pay down your debts, allowing you to spend as little as possible to get back on track.
Cons of avalanche method:
- Unlike the snowfall method, this method will not provide instant gratification, and initially, it may take a while to pay off debts. As a result, maintaining a disciplined approach is difficult for some people in this method.
Debt Tsunami Method
You might have heard that when dealing with finances, don’t let your emotions interfere. Still, the Debt tsunami method (named by Adam Baker from Man vs. Debt) contradicts this and advise you to pay off your debt according to the emotional impact on you.
Sometimes a particular debt can be an emotional burden on you more than the other debt. In this method, instead of worrying about the amount you owe or the lender’s interest rate, you prioritise the debts that have the most significant psychological weight.
For instance, a friend’s loan might bother you more than your credit card debt, and you want to repay your friend as soon as possible. In this case, you don’t worry about the interest rate or the amount. You just repay your friend first.
Pros of debt tsunami method:
- Debt tsunami is not always a cost-effective method, but when the emotional influence of any debt is high, you should consider it. With this method, you not only lessen the psychological impact but also gain the necessary motivation to seize control of your finances.
Cons of debt tsunami method:
- You can’t deny that there are cheaper ways to reduce your debt than the debt tsunami approach. If you are looking for the most cost-effective way possible, consider other options.
Balance Transfer Credit Cards Method
Having multiple credit card loans is a common phenomenon, and many people are struggling to manage the repayments and high-interest rates for each separate credit card debt.
With a balance transfer method, you will be able to bring your credit card debt under control by consolidating multiple credit card accounts onto a single credit card. It’s like a Sometimes with a new card, you can take advantage of no interest charges for an introductory period – for example, 0% p.a. on balance transfers for the first 3 months. Some balance transfer options also let you transfer personal loan debt, which is another excellent option for consolidation loans.
Pros of balance transfer credit card
- It will make your debt easier to manage, and with the no-interest-rate period, you can bring your debt under control. Only having to make one monthly repayment rather than several separate repayments for each individual debt is also a relief.
Cons of balance transfer credit card
- While applying for a balance transfer credit card, keep in mind that you need a good credit history to get the best offer. And there might be an initial balance transfer fee. Also, calculate the interest rate you will be paying after the zero-interest period ends.
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