Paying off debts can be worth preserving. It helps ensure a sound and peaceful mindset but catalyses your next big life goals. Additional debts with pending debt payments may be challenging to deal with. Thus, pay off the existing debt before applying for a new one. It may help you fetch low-interest rates and costs. Paying off debts reduces liabilities and improves your credit score.
The good part is- you can control your debt from wherever you are today. All it requires is planning. Prioritise good debts and bad debts impacting your financial scale. Good or managed debts are debts that bridge the gap between you and your lifestyle goals, like long-term loans from direct lenders like- student loans, mortgages, home renovation loans, or car loans. These are secured loans, and non-repayment may lead the lender to seize the asset.
Bad debts or problem debts are the ones that impact your financial capabilities and restrict you from achieving goals. Credit cards, payday loans, buy now and pay later schemes. Precisely, bad debts are high-interest rates debts that do not directly contribute to life improvement.
Short-term loans like payday loans help with emergencies. These are competitively priced and could lead to arrears if one misses payments in a row. It impacts the credit score and leads to worse situations leading to bankruptcy.
How much debt may impact financial stability?
Every person has unique financial goals and circumstances. The intensity of the debts impacting the finances depends on the income, outgoings, liabilities, and savings. If you cannot save enough towards your prime goals due to liabilities, more debts may further impact the situation.
You can calculate the debt that may impact your finances in the long run or not by knowing your debt-to-income ratio. It is the ratio that highlights the ratio of income to expenses. If you have less flexibility and cannot save much, it indicates a high debt-to-income ratio. Moreover, making late payments on debts, credit cards, or bill payments may impact the ratio and the credit score.
What’s the best trick to pay off the debts?
There are primary high-interest and low-interest debts. The best way to optimise your credit profile is to pay high-interest debts like- credit cards, student loans, payday loans, utility bills, taxes, rent, etc.
When you clear a proportion of high-interest debt, your profile may improve. It reduces the risk of significant credit loss. After paying the high-interest ones, you can resort to low-priority debts like- home collection loans, overdrafts, store card payments, catalogue payments, etc.
Home collection or doorstep loans are the easiest way to get cash at home. Several doorstep loans may impact the overall credit well-being. These have around 400% APR or overall loan costs. Thus, you should always pay these first in short-term loans.
How you can structure repayments to close debts quickly?
You would need a strategy to pay off debts in the best possible way. Regardless of whether you want to settle a long-term or short-term loan, there are some tested ways. The most common way to clear debts is by dedicating a part of your savings or setting up direct debits. It is ideal for individuals to pay small repayments through direct debit. If the income is good, it will not impact the monthly budget. Here are other ways to pay off debts:
1) Work out a personal budget
Before beginning the payments, figure out the total amount you can dedicate toward debt. For this, you need to know your spending- important and discretionary ones. Identify if you can cut on some unnecessary expenses. If yes, you can close the debts early.
Dedicate the portion of your disposable income towards high-interest, short-term debts that you struggle to pay. In this, you pay a minimum towards small loans.
For example, you have 2 small loans and pay half the repayment amount on each. It helps you reduce small loan debts gradually. You can also overpay on some loans if the lender allows it. It is important to know the lender’s terms before paying extra.
2) Pay extra savings toward long-term loans
Generally, one budget takes both short and long-term loans into the scenario. While doing so, always keep some cash flexibility. It means saving more than you need to pay the loans. For example, if your total loan payments are- £25000, save around £30000 for easy management. Apart from helping you tap some in critical need, you can use a part to clear long-term loan payments.
3) Consolidate credit card debt payments
Credit card debts are high-interest debts that may not be good for your finances. Here you can use a balance transfer card to consolidate your credit card debts. In this way, you can move the debt on multiple credit cards on one balance transfer card. If you have a low-interest balance transfer card, it could be a profitable deal for you.
Though you can use a balance transfer card to pay off the credit card debt, consolidation is also a good option. It allows you to consolidate other debts as well. It is ideal for individuals with good or fair credit history.
By consolidating all the high-interest debts, you pay only a single payment towards a loan; every month. It helps you reduce interest rates and pay a comparatively low amount as repayment. You no more deal with multiple lenders; instead, you pay your dues to only one.
4) Check the best Debt Management Plan
A debt management plan is usually an agreement between you and the creditors to clear the debts. It is for individuals who share the potential to pay debts but want to manage them better. It is also for those who can pay only a small amount every month under financial distress but can pay the loan gradually in easy monthly repayments.
Thus, you can do this alone by discussing it with your lender or hiring experts. However, before doing so, analyse the fees you would be liable to pay the creditor and the debt management company. While it may require dedicating some crucial time, it is worth it.
While a debt management company can help deal with debts by discussing and dealing with creditors on your behalf, doing it independently may help.
5) Identify possibilities of debt orders
Debt relief orders are one of the best ways to get rid of debt up to £30000. If you qualify for one, the lenders may not take any action to recover the dues without the court’s permission. You would have to pay £90 for the proceedings. If the authority believes you cannot pay the dues even after 12 months of the order, it gets written off.
Eligibility of Debt Relief Order
- You owe less than £30000 to creditors in total
- Have savings and valuables totalling just £2000
- Do not have enough money left by the month’s end for debt repayments
- Live and work in England and Wales for atleast 3 years
- Are not bankrupt currently or on Involuntary Voluntary Arrangements
- Have not applied for Debt Relief Order for 6 months
Bottom line
Struggling with debt payments can be stressful, but having a tap over your options can ensure financial freedom. The above-listed debt payment tips may help you accomplish your financial goals. Take help from your creditors, budget, and reduce additional expenses to a minimum. It would help you pay the dues without further delay.
