Many of the reader questions I receive are inquiries on how to pay off debt, most in regards to the optimal order to pay off the debts.
Ways to pay off debt
I have mentioned this before, but it’s worth repeating – in most circumstances it is best to pay off debt in order from highest to lowest interest rate. Put another way, if you have an auto loan at 10%, credit card 1 at 16%, and credit card 2 at 24%… it’s usually best to repay credit card 2, credit card 1, then the auto loan. This route should cost you the least amount of money.
Some exceptions to this rule can include losing motivation to repay highest interest debts because of large balances, or debt with tax deductible interest like student loans and mortgages. If the balances on your high interest debts are quite large, they may take awhile to pay off, possibly several years or more. If that will cause you to lose steam you should consider repaying your debt in order from smallest to largest balance – as suggested in Dave Ramsey’s Financial Peace University. Debt with tax deductible interest may be best left for last since it can reduce your tax burden… but determining the order is always unique to each situation, so generalizations should be considered just that.
Whatever your circumstances, I encourage you to try repay debt using good old fashioned discipline and self-management before paying someone to help you pay it off – but since many are beyond being able to help themselves… let’s consider some progressive options.
Debt consolidation using peer lending
Sometimes you’re better off consolidating a number of smaller debts into one. Possible benefits of consolidation include lower interest rates and the simplicity of having fewer lenders.
I consolidated debt using Lending Club. Read my Lending Club Review for details but in summary I consolidated an auto loan and 3 credit cards – each with higher rates than my Lending Club loan. You don’t have to use peer lending to consolidate your debt, but it’s certainly a solid option. Using Lending Club I repaid over $11,000 in just 7 short months – the process would have taken much longer had I not consolidated.
DIY debt management
If you can afford to repay debt but could use help organizing payments and determining who to pay first… check out DebtGoal. Before you consider using a full-fledged debt relief company, I encourage you to give their service a shot. In short, DebtGoal is a DIY middle ground between self service debt management and full service debt management.
I am in the process of writing a full review of their product, but have already checked it out and feel comfortable endorsing it. Using their service should save you far more each month than it costs, and right now they’re offering a free trial.
If you are in financial trouble and need professional help, be sure to choose your debt relief partner company carefully. I’ve been searching for a reputable debt relief services company for years and will confidently endorse a company once I find one I trust. If you can manage your debt yourself, then do so, but if not… debt relief services with the right company can be a solid option.
I highly recommend this free professional debt relief analysis to help you get a handle on things. This company rocks, and I endorse them with confidence.
Debt management plans are useful for those struggling to keep up with monthly credit card or other debt payments. A company offering this service should help facilitate the consolidation of unsecured debt into a single monthly payment, negotiate lower interest rates and waived late fees with creditors, and provide comprehensive debt counseling.
Debt relief companies also typically offer debt settlement services for those who cannot afford the monthly payments and are looking for an alternative to bankruptcy.
Other ways to pay off debt
To pay off debt, you can also:
- stop spending!
- get on a budget
- get a loan from loved ones
- get a 2nd job
- considering the cost of owning a car… try selling one
- sell other stuff you don’t need
- refinance your mortgage – read how I saved over $41,000 by refinancing.
However you pay off debt… just pay it off! Reducing your debt burden increases you freedom. If I have a $2,000/month mortgage, a $1,100 in auto payments, $600 in credit cards, etc., etc., etc., I’m going to have a lot of pressure to repay that debt each month. If I choose instead to sacrifice my wants and focus on true needs… I will simultaneously reduce financial pressure, increase giving, and increase my freedom to spend my time doing things I enjoy rather than working to repay interest on debt.
I don’t know about you, but that’s very appealing to me!
Mikel Matthews says
I know so many families have never set up a household budget but it is very vital to keeping your financial house in order. When setting up your budget it is necessary that in order for it to be successful you have to provide as much detailed information as possible. The end result will show you how much money you have, where it is coming from and where it is all going.
Matt Jabs says
Precisely Mikel. I also encourage families to become painfully intimate with the details of their finances. One great way to do this is by avoiding automatic connections between their bank and their budgeting software choosing instead to import the downloads and manually categorize each transaction. That is why I support YNAB software for those looking to reconnect with financial stability.
Based on the recommendation here of debtgoal.com, I started using them and so far its quite helpful. They give the options of a paying off debt from either lowest balance to high balances (a la Dave Ramsey system) or paying highest interest first balances first including the interest savings for each. Its based on a 5 year payback system, your balances and your interest rates.
Its pretty easy to use but the software still needs some polishing for some features are not user friendly.
Matt Jabs says
Thanks for the feedback Jose… which option are you choosing to repay your debt?