Debt repayment plans are structured strategies to help you pay off your outstanding debts in a manageable way. These plans can be self-administered or facilitated by credit counseling agencies, financial advisors, or debt relief services.
Here are 6 debt repayment strategies recommended by financial advisors and credit counselors.
1. Debt Snowball Method
The Debt Snowball method involves paying off your debts from the smallest balance to the largest, irrespective of interest rates. Popularized by financial guru Dave Ramsey, this strategy focuses on quick wins.
Dave Ramsey advocates for this approach through his popular financial education programs. He argues that the psychological wins of clearing smaller debts first provide motivation to tackle larger debts.
What are the benefits of this Plan? The key benefit of the Debt Snowball method is psychological. Completing payments on smaller debts can provide a sense of accomplishment and motivate you to tackle larger debts.
How to implement debt snowball? List all your debts from smallest to largest. Focus your financial resources on paying off the smallest debt while making minimum payments on others. Once the smallest debt is cleared, redirect these funds to the next smallest debt, and so on.
2. Debt Avalanche Method
The Debt Avalanche method is one of the most popular debt repayment plans. It is the opposite of the Dave Ramsey’s Debt Snowball strategy. Here, you prioritize debts with the highest interest rates.
Suze Orman recommends the Debt Avalanche method, where debts with the highest interest rates are paid off first. Orman focuses on the financial efficiency of this method, highlighting how it can save money in interest over time. She discusses this method in her books and TV shows.
Benefit of this strategy: This method can be more cost-effective over the long term as it minimizes the amount of interest paid.
How to implement this debt repayment plan? Organize your debts by interest rate, paying the most attention to the highest rates. Pay as much as possible towards the debt with the highest rate while making minimum payments on the others.
As each debt is paid off, apply the same strategy to the next highest interest rate.
3. Debt Consolidation
Debt consolidation combines multiple debts into a single obligation with a lower average interest rate. This could involve taking out a new loan to pay off other debts or transferring various debt balances to a single credit card.
While not tied to a single financial guru, debt consolidation is often recommended by financial advisors and credit counselors. It is a common strategy discussed in financial literacy materials because it can simplify multiple debt payments and potentially lower interest rates.
How is this strategy beneficial? Simplifies your debt management by reducing the number of payments you need to track and can lower the amount of interest you pay overall.
How to implement this strategy? Apply for a consolidation loan or a low-interest credit card and use it to pay off other balances. Ensure that the consolidation process actually provides a lower interest rate and manageable monthly payments.
4. Debt Management Plan (DMP)
A DMP is a structured plan provided by credit counseling agencies that helps you pay down your debts through negotiated lower interest rates and payments.
Debt management plans are generally promoted by credit counseling agencies rather than individual financial gurus. These agencies will work with you to negotiate more favorable repayment terms with your creditors.
Experts in consumer credit counseling often advocate for DMPs as a way to manage large amounts of debt, especially credit card debt.
What is the benefit of this method? Reduces your interest rates and consolidates your debt payments into one monthly installment that you pay to the counseling agency.
How to implement this strategy? Contact a reputable credit counseling agency to discuss your options. They will handle negotiations with your creditors and tell you what payment you need to make to the agency each month.
5. Balance Transfer
This debt repayment strategy involves transferring existing debt to a credit card with a lower interest rate. These credit cards often have a promotional 0% APR.
Financial advisors and personal finance experts often suggest using balance transfers as a strategic move to manage credit card debt by reducing interest costs. This approach is frequently discussed in articles and books about credit management.
Balance Transfer is also a common recommendation if you have good credit. This is because you can qualify for low or zero interest promotional offers.
How is this method beneficial? This strategy can significantly reduce the amount of interest you pay if you can pay off the transferred balance during the promotional period.
How to implement it? Apply for a credit card offering a 0% interest rate on balance transfers. Transfer your higher-interest balances to this card. Aim to pay off the balance before the promotional period expires to avoid higher interest rates later.
6. Hardship Plan
For those experiencing severe financial difficulties, many creditors offer hardship plans that temporarily reduce interest rates, lower monthly payments, or even waive certain fees.
Hardship plans are less about financial strategy and more about necessity. This method is typically advocated by consumer advocates and credit counselors when you’re facing financial crises such as;
- Job loss
- Medical emergencies
- Other significant life disruptions.
These aren’t promoted as a proactive strategy but as a reactive measure to avoid defaulting on debts under difficult circumstances.
How is Hardship Plan beneficial? This strategy provides relief during financial emergencies by making your debts more manageable.
How to implement this strategy? Contact your creditors to inquire about available hardship plans, explaining your financial situation. Be prepared to provide proof of your financial hardship.
Bottom Line
Making the right choice from these debt repayment plans requires a good understanding of your financial situation and the specific terms of each strategy.
Whether you need psychological wins to keep motivated or a strategic reduction in interest rates to save money, one of these debt repayment plans could help you manage and eventually eliminate your debts.
Remember, you don’t have to navigate this journey alone. Financial advisors and credit counselors can provide you with invaluable assistance.
