How to Best Pay Off Your Debt

Feb 17, 2016

In our last post, we talked about how to stop accumulating debt.
Now it’s time to talk about the best resources you can use to begin paying off your debts.

personal loans

Paying off your debts in the most efficient and, of course, cheapest manner possible is crucial to your long-term financial success.

When you’re getting ready to pay off your debts, there is a very simple, intuitive process to follow:
pay off the debts that have the highest interest rate first and the ones with the lowest interest rate last.
Here are three easy steps to pay off your debts using the least amount of money possible:

1. Evaluate how much you owe

If you’ve been following our blog, you should have set up a budget (if not, check out this post!), and are aware of how to control your spending habits moving forward without accumulating more debt.

Next, evaluate how much money you owe across-the-board. Review credit card statements, student loans, or car payments, as applicable. Compile all debts, and add up the amount of money needed to pay off each debt, including the respective interest rate or APR for each one.

The easiest way to do this is to create a table with four columns and a separate row for each debt you owe.

  • In one column put the full amount you owe (for instance, $5,000)
  • In the next column, put how much you have left to pay off (if you’ve paid off $1,000, then you only have $4,000 left!)
  • In the third column, write down the interest rate or APR (for instance 7%)
  • Lastly, in the fourth column, put down how much it would cost to pay off the loan including the additional money you will owe because of the interest rate and other fees (so $4000 + $280 in interest fees = $4,280).

2. Set a certain amount to pay off each month

After you’ve started evaluating your debts, it’s important to consider how much you can reasonably pay off each month.

Warning: be careful in deciding on this amount! Do not land on an amount that will be unachievable or an amount that will strip your life of all fun activities or hobbies. For instance, it is near impossible to dedicate half of your earnings each month to paying off debt (unless you’re making a very substantial amount of money or have mastered how to live on very little expenses).

Pro Tip: When deciding on an achievable, fixed amount of money that will go towards paying off your debt every month, factor in future expenses that may come up (such as holiday travel etc). If you can still pay off the same amount even during months that require other expenses, the consistency will help ensure paying off your debts becomes a habit!

A good ballpark is to consider contributing 10-20% of your monthly income to paying off your debts. However, each person is different. Decide on an amount that is realistic and works for your lifestyle and expenses.

3. Rank debts in cheapest pay-off order

Now that you’ve figured out how much can you pay towards your debts each month, you need to decide which debts you’re going to pay off first. It’s important not to worry about paying off a specific debt as they relate to individual large purchases. Instead, pay off certain debts first if it will save you more money to do so.

Reference back the chart you made in step #1 and the percentage in column #3. Which debt will cost you the most in interest fees alone to pay off? That is the debt you want to pay off first.

4. Consider refinancing.

Refinancing is when you get a new loan to pay off a pre-existing loan. Sounds strange, right?

Despite the aversion to taking on more debt, refinancing can save you lots of money in the long term. If you’re currently facing credit card debt, the chances are high that the interest rate (or APR) is very high. Refinancing--taking on a new loan with a better rate to pay off the old loan--could save you thousands of dollars.

If you’re interested in refinancing, be sure to see if you pre-qualify for our rates at Backed. We provide loans with rates up to 12% lower than other companies. That could be up to a $1,200 savings on a $10,000 loan!

Any questions on how to best pay off your debts? Feel free to drop us a line!

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