People have undoubtedly faced some unprecedented financial challenges. Between student loan debt, rising costs for everything from housing to a cup of coffee, and wages that have barely moved (after taking inflation into account), the struggle is real. Fortunately, their situation doesn’t have to be this way forever. Here are four good strategies borrowers can use to figure out how to get out of debt and back in control of their financial lives:
1. Make a budget
Love them or not, budgets are a must-have for anyone who needs to do a deep dive into their finances. The beauty of a budget is that the more familiar you get with your transactions, the more likely you are to find areas where expenses can be cut and applied toward your debt.
Making a budget doesn’t have to be complicated. It can be as simple as one that’s made with paper and pencil, or a spreadsheet in Google Sheets. There are even apps you can download to your smartphone which will sync with your bank and credit card accounts.
2. Use a debt payment acceleration strategy
If you’ve got more than one form of debt, it can be beneficial to pay off certain ones before others. This is typically done using one of two popular debt payment acceleration strategies:
- The debt snowball method – Put your debts in order from smallest to largest based on the loan amount and begin focusing on paying off the smallest one first. Once eliminated, take the money you were paying and roll it towards the payment for the debt with the next smallest amount. Continue the cycle until all your debts are gone.
- The debt avalanche method – Put your debts in order from highest to lowest interest rate and begin focusing on paying off the highest one first. Once eliminated, take the money you were paying and roll it towards the payment for the debt with the next highest rate. Continue the cycle until all your debts are gone.
Many people have found these techniques to work because they’re easy to follow and the payments grow with each successive cycle.
3. Refinance your loans
Even though it can feel like you’re stuck with whatever amount you owe to a lender, the good news is that you’re not. Many loans can be refinanced, meaning you can replace them with a new loan that has more favorable terms. This might be to achieve a smaller payment amount, lock into a lower interest rate, or change the number of payments.
If you’ve recently increased your credit score, then you should look into refinancing. Generally speaking, people with Excellent and Very Good credit will get great rates, and this could potentially save you thousands of dollars in interest over the life of the loan.
4. Apply for a debt consolidation loan
If you’ve got multiple debts and some aren’t available for refinancing (such as a credit card balance), a different route is to take out what’s called a debt consolidation loan. This is where you’ll apply for one larger loan that you can then use to pay off all the smaller high-interest debts.
Under the right terms, debt consolidation loans can be a very quick and simple way to knock out everything you owe all at once. Again, to qualify for the best possible terms, it will help to have an Excellent or Very Good credit rating.
The bottom line
Borrowers don’t have to live with debt. By setting up a budget and using a debt payment acceleration strategy, they can eliminate their debts one by one. Additionally, borrowers also have the option to refinance their loans or consolidate them into one.