When you are facing a mountain of debt, you may have no idea where to start making payments. The large sums are intimidating when you only have so much income to work with. Once you start adding in the various interest rates attached to each debt, it quickly becomes unclear which debts should be tackled first. You need to choose which debts to make a priority, but cannot decide which should be repaid immediately and which can slide by on minimum payments until more money is made available.
You need a debt repayment plan to determine which of your debts should come first. While there are many debt advice companies out there offering this service, you are quite capable of making these decisions on your own, with a bit of guidance. Follow these basic steps to repay your outstanding debts, and over time you will see your balances grow smaller until the debts are wiped clear.
1. Consult Your Budget
You should have an existing budget, detailing your monthly income and expenses. It will also show how much money you have left over each month, which you may normally put in savings or spend unknowingly. This amount will be applied to your outstanding debts. If you do not have much left over each month, you may need to increase your income by cutting back on frivolities, getting a different or second job, or selling unwanted items.
2. Create a List of Debts
In order to fix your outstanding debt problem, you must be willing to face your debts head on. Write down every debt you have, from credit cards and payday loans to student debt and your home mortgage. List the outstanding balance, the minimum monthly payment, the interest rate, and the type of debt. Once you have this list of debts, you will be able to see which debts are taking a large amount of your available income, and which debts are growing quickly due to high interest rates.
3. Organise Your Debts by Priority
This is where many people stumble in the efforts to repay their debts. It is too easy to give up at this step, as every creditor deems their debt the highest priority. However, you have to decide which debt is the most important one to keep current and quickly pay off. Your home mortgage will likely be at the top of this list, as you have to keep a roof over your head. If you have an auto loan, it will also be a high priority, so you can continue to commute to work. Also, any student loans or judgments against you must be paid according to the established schedule, so they must be at the head of the pack as well.
4. Put Your Remaining Debts in Order from Highest Interest Rate to Lowest
Once you have established which debts must take top priority, list the remaining debts by interest rate. The higher the interest rate is on an account, the more you will pay over the lifetime of the debt. Therefore, the quicker you can pay off your high interest debts, the more money you will save. Once you have paid off your first loan, all of that money will become available to apply to your other debts.
5. Write or Call Your Creditors to Negotiate Payments
If you find yourself struggling to pay even the minimum amounts on your outstanding debts, get in contact with your creditors. While many people are intimidated by talking to their creditors, it is the only way to let them know that you want to repay your debts, but are not currently able to. Many creditors will be willing to renegotiate the terms of your loan, lower your interest rate, or accept a lower balance than the original amount.
However, these options may impact your credit score, so consult with a free debt advice charity such as the Citizen’s Advice Bureau if you have questions.
Your outstanding debts can have a real effect on your financial security, your credit, and even your home if you do not take care of them in a timely manner. Make a plan to repay your outstanding debts, by prioritising your debts and working with your creditors, not against them. Over time, you will have regained a stronger financial footing, and will be free of the stress of too much debt.