5 Popular Ways to Pay Off Debt
Drowning in debt? You may be so busy trying to keep your head above water that you miss the lifeboats passing by.
If you’re confused about your options or nervous about choosing the wrong one, keep reading to learn about five popular ways to get rid of debt. It’s time to stop treading water and start putting your debt in the past!
1. Minimum payments:
While this is a way to pay off debt, making minimum payments may also keep you in debt for a longer time and, due to interest, force you to end up paying more than the original debt owed.
Since it’s a small percentage of your debt, your minimum payment amount should be affordable each month. But over time, as compound interest adds more and more to the balance, that small percentage may grow to become an unaffordable minimum due each month.
And if you fall behind, late fees will get added and the payments will become even less affordable. This leaves you less cash left over to pay for regular expenses and emergencies, which may force you to rely on credit cards even more.
That’s why minimum payments are easily the slowest and most costly way to deal with your debt. In fact, it’s one way to get even deeper into debt.
2. Debt consolidation loan:
You can use the funds from a consolidation loan to pay off all your outstanding debts right away, then start making one payment every month on the loan instead. This can help make life easier, since managing many payments at different times of the month can be stressful and time-consuming.
If your credit score is high enough, you could qualify for an interest rate that’s a lot lower than the rates on your credit cards. That means your loan could save you money over time.
But if you can’t qualify for a low rate, your monthly loan payment will likely be larger than your credit card minimums combined. So if it’s difficult to afford your minimum payments now, a debt consolidation loan may not be the right choice for you.
3. Credit counseling:
This option could help you pay off some or all of your debts in less time than making minimum payments. You’d start by working with a consumer credit counseling agency that offers a debt management program (DMP).
With a DMP, the credit counseling agency negotiates with your creditors to lock in a debt repayment plan over a certain amount of time, typically at a lower interest rate than you’re currently paying. The agency will charge you an initial set-up fee for this and will also collect “fair share” payments from your creditors.
Not all creditors participate in credit counseling programs, which means you may not be able to use this option for all of your credit card debt. Debts that are enrolled will be reported as “closed by consumer” to the credit bureaus, which may negatively impact your credit score.
Similar to a debt consolidation loan, a DMP may require you to make larger monthly payments than you’re making now. So if you’re struggling to afford your current payments, credit counseling may not be the right option.
4. Debt settlement:
If you want to reduce the amount you owe and get rid of your debt faster than making minimum payments, then a debt settlement program like Freedom Debt Relief could help.
In this type of program, you can enroll your unsecured debts, including credit cards, medical debts, and personal loans. These debts are then negotiated with your creditors on your behalf to settle for less than you owe. During the program, you’ll voluntarily stop making payments on the accounts you enroll and instead start making one monthly program payment that will be used to fund settlements and pay off those debts.
Your monthly program amount may be lower than what you’re paying your creditors now, and your debt could be settled in as little as 24-48 months.
Debt settlement impacts your credit score in the short term. However, since the program reduces your overall debt burden, your credit score should start to recover as debts are settled. Once you complete the program, you will be on much stronger financial footing—free of those debts!
While this is often seen as a last resort, bankruptcy may be the best option for some people. Since bankruptcy is a legal process where your assets are examined and used to pay off debt, it requires legal representation. Bankruptcy attorneys have an upfront retainer cost, and there are additional costs such as filing and court fees.
Chapter 13 bankruptcy involves a “repayment” plan where you make structured payments over time to creditors. Chapter 7 bankruptcy is known as “straight bankruptcy” and can only be filed if you can demonstrate you have no means to repay the debt via Chapter 13.
Whether you file Chapter 7 or Chapter 13, both will result in negative information being reported to the credit bureaus. If you file Chapter 7, that information will remain on your credit report for 10 years. It’s also very likely that you will lose property, as some or all of your assets are sold to pay creditors. There’s a good reason why people try to avoid bankruptcy at all costs.
Learn more about any of these options—we’re here to help!
We’re here to help you understand your options and connect you with the right resources. Whether you want to calculate the cost of making minimum payments, get a consolidation loan rate, or begin a debt settlement program, just give one of our Certified Debt Consultants a call at 800-910-0065.
We’re ready to discuss your goals, answer your questions, and help you figure out which option is right for you.