How to get rid of loan debt

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

There are several approaches to paying off debts and loans. To find the one that's right for you, you need to consider all their pros and cons.

It is not easy to live under the burden of debt, but nowadays few people manage to do without loans. However, there are several ways to get out of debt slavery ahead of schedule. Perhaps some of these strategies will work for you.

1. Snowball method

Imagine that you are making a snowman. You need a large snowball to base it. To make it, you first sculpt a small snowball, and then roll it over the snow until it turns into a large ball.

You can do the same with debts. Try to pay off the smallest loan as quickly as possible first, regardless of its interest rate. Invest every free ruble in it. Once you close this loan, start adding the same amount you paid on the already closed loan to the mandatory payment for the next smallest loan. As a result, you will have the largest loan for which you will deposit as much money as you currently spend on all your loans.

pros

Each debt paid off is a tangible victory. As you close one loan after another, you will feel like you are dealing with the situation.

Minuses

This method is not the most profitable, as its goal is to reduce the number of loans, and not to quickly reduce the total amount of debt. It may turn out that the last and longest loan will be the one with the highest interest rate. The longer you pay it, the more interest you will pay on it.

2. Stack or avalanche method

First, you need to list your loans in descending order of interest rate. First of all, try to close the loan with the highest interest rate. For the rest of the loans, make the minimum obligatory payment, and for the loan with the highest interest - the minimum payment and some on top. Once you've dealt with the most expensive loan, move on to the next one on the list.

pros

This method allows you to save on interest.

Minuses

Large loans can take a long time to pay off. With this method, the result is not immediately noticeable, so many people lose heart and there is a desire to abandon this method.

3. Snowflake method

The two previous methods assume that every month you can allocate additional funds from your budget to early repay loans. Unfortunately, not everyone has such an opportunity and not always.

However, almost everyone has one-time unplanned income: a tax deduction, funds from the sale of something unnecessary, occasional part-time jobs or monetary gifts for the holidays. The snowflake method is that you use all this money to pay off debts. Perhaps these will be very small episodic amounts. However, huge snowdrifts grow from tiny snowflakes.

pros

Small early payments are better than nothing. With them, the amount of debt will still decrease faster than without them.

Minuses

This method does not predict when you will be able to pay off your debts in full.

4. Consolidation and refinancing of loans

The essence of this method is that several loans in different banks are replaced with one large loan. In some cases, you can reduce the amount of monthly payments by winning interest on refinancing.

pros

The new lending conditions may be more profitable than the old ones. Paying one debt instead of several is more convenient and psychologically easier.

Minuses

Not all banks provide the service of loan consolidation and refinancing of their own loans. The costs of processing and collecting a large package of documents may be required. Some banks levy a penalty for early repayment, which occurs when the loan is refinanced by another bank, and in some places early repayment is generally impossible.

It is not so important how you pay off your loans. It is much more important that you do it. Therefore, the best way for you is the one that you can stick to. Whichever strategy you choose, do not retreat from it until you have paid off all your debts.