We've all been there. We start to reach good family earnings and it's time to sign up for the next season of a ridiculously expensive youth sport, payoff that last trip to the Mall of America, or book your Spring Break family vacation. Maybe you're a business owner getting a little ahead of your business's success. Whatever your situation is, it's a new year and a great time to make a plan on how to get rid of that debt you may have hanging over your head. We've got you covered, there are options.
The Debt Snowball
Popularized by financial guru Dave Ramsey. This method asks you to take stock of all your debts — loans, credit cards, mortgages, and other lines of credit with balances — and list them in order of smallest balance to biggest. That’s the only factor you need to take into account. Easy. It's all about getting quick, easy wins so you see momentum and progress.
For example, if you have three student loans and owe $5,000, $10,000, and $15,000 respectively, that’s exactly the order you list them out in. And that’s the order you’d work to pay them off in, too. The debt snowball has you put as much money as you can toward your debt with the lowest balance first, while still maintaining minimum payments on your other balances. Once you repay that first debt, you take the amount of money you were applying toward it, and combine it with the minimum payment you were making on the loan with the second-lowest balance. Your payment on this second-lowest balance loan “snowballs,” because the payment is the combination of what you paid toward the first loan and the minimum payment you were already paying on the second. You’ll continue to snowball your payments and knock out your debts one by one, until you’re debt free.
Is it right for you?
If you answer "yes" to these questions, it may be your answer.
1. Do you need to see quick progress to stay on track?
2. Do you feel overwhelmed by multiple accounts?
3. Do you already have a good or excellent credit score? (both options would work for you in this case)
The Debt Avalanche
The debt avalanche is another system for repaying your debt. With this strategy, you again take stock of all your debts and list them out — but this time, you’ll order them by interest rate. This is the most cost efficient way of the two to repay your debt but you'll potentially reduce the number of debts more slowly.
With the debt avalanche, you’ll list them out in order from highest interest rate to lowest (regardless of balance). Then you’ll work to repay the balances in that order, taking out the loan with the highest interest rate first, then the second-highest, and so on. The only difference from the debt snowball is the order in which you repay your loans. The biggest advantage to the avalanche is, from a mathematical standpoint, you come out ahead because you’re getting rid of your most costly loans first. Because you’re knocking out loans by interest rate, you’ll gradually pay less in interest over your repayment period.
Is it right for you?
If you answer "yes" to these questions, it may be your answer.
1. Do you care most about saving as much money as possible?
2. Do you have large debt with a high interest rate?
3. Are you detailed enough to read the fine print and account for all fees?
Debt Consolidation
Sometimes it's frustrating when there are multiple debts outstanding and due to multiple companies. In these cases, a simplified approach may make sense for you. When you consolidate, you start by taking out a single loan for the total amount of the debt you want to repay. This could provide payment relief, interest rate relief, and/or a combination of all of the above.
In a debt consolidation loan, you take the borrowed money from the new loan and repay all the individual loans with balances you already had. Then, you work to repay the single, new loan. This is a good option if you’re feeling overwhelmed because it simplifies your financial situation. Instead of having multiple loans to keep track of, consolidating leaves you with a single loan — with a single interest rate, monthly payment, and due date. It’s also worth looking into if your current loans carry high interest rates that cost you money. One way to minimize rates and improve your position may be refinancing your home to consolidate debt.
Whatever strategy you choose, there is nothing like the feeling of making that last payment on a loan or credit card bill. We can help you get on track. Contact one of our lenders to start your debt free journey!
