It is not necessary to fall into over-indebtedness to devise a debt repayment plan. So if you have already calculated your level of indebtedness and you see that it is at the limit of what is healthy or has already exceeded it, do not let much time go by to act. From the outset I want to clarify that there is no magic formula that can or should be applied to all cases of indebtedness, each of them is different and must be evaluated separately.
Sometimes it is recommended to start with the small debts and then attack the large ones, but with that recipe the root problem would not be taken care of or real relief would be felt. Personally I do not recommend trusting the international method known as the “snowball”, unless all your debts cost more or less the same. I explain better: Assuming that the above table were your debts, the “snowball” method would first eliminate the smallest debt and once paid, use that available money to attack the second smallest and so on until you reach the largest.
But, in this case, the smallest is a loan whose fee and interest rate are fixed, and the rate is the lowest of all the debts listed. Therefore, it is not a debt that will grow or threaten your financial stability. Do you see what I mean when I tell you that you cannot blindly trust that method? However, the credit card – although it is not the largest debt – is the one that is most likely to continue increasing, due to the application of value maintenance and high interest rates. On the other hand, the largest debt (that of the commercial house), although it is the highest rate, also has a fixed fee and if you pay credits you will not reduce interest, but you will only see relief if you cancel it time .
What would I do? He would begin to attack the card strongly and once he canceled it, he saved what he intended for that payment and ended the credit in the commercial house; all while keeping my personal loan up to date. Once the card and the commercial house are paid, the money available for extraordinary payments on the loan is destined.
What should we do then? Here I show you several aspects that should be taken into account before deciding where to start.
1. Make an inventory of debts
The first thing is to be clear about our situation, but this does not only mean listing how much we owe, but detailing the amount of the debt, annual and monthly interest rate and the fee or payment thereof. Once we have a clear picture, it will be easier to identify where to start. It would be something similar to the table above.
2. Assess the situation
The problem may not necessarily be the amount of debt, but what its payment means to us and how much it costs us. For example: it is not the same as owe $ 10,000 for a mortgage loan – which pays an annual interest rate not exceeding 10 percent (0.8% monthly) -, which owes them to credit cards, whose rates in cordobas reach up to 50 annual % (4.16% monthly).
Above all, you must identify if you want to get out of debt because payments are already impossible, or if you simply want to pay less interest and in a shorter term, but the fees do not compromise your budget.
If your case is the first, the priority should be to reduce the most expensive credits, those for which you pay high interest. Why? Because these debts begin to decrease, because they are such expensive interests, you will quickly feel relief and pay less.
3. Analyze your budget thoroughly
If you are not clear about how much you can really afford, you can hardly decide well. Here it is necessary to formulate an austere budget, so that as much as possible can be used to pay debts. Why do I recommend this? Because it would be of no use if you spend 90% of your income to pay debts if with the remaining 10% you cannot cover the basic expenses and you would have to resort to more debts for it. If you do not know how to make a budget that you can really meet, I recommend this article.
4. Review the guarantees and risks
Regardless of whether the debt is with a bank or a lender, what guarantees have been given for that credit must also be put on the balance. Whether someone signed you as guarantor, if the house was guaranteed or if the guarantee is your salary, you must weigh what would happen if that debt becomes unpayable and based on it meditate the decision.
A loan between individuals verbally agreed will not represent the same risk as one involving a wage garnishment. And if one of your debts is in some basic service such as electricity or water, or you have late payments in the payment of your home, you must be a priority for the serious implications that your default would have.
5. Ask if changes can be made to those debts
For example, if you have several credit cards to the maximum and with difficulty you can make the minimum payments, it is healthier to make a personal loan or a refinance (at rates that are usually half that of the cards). Yes, in the end you will unfortunately owe the same or a little more, but with other payment terms that could free you meaningful sums of money from your income (and you would pay less interest).
Let’s review the list in point 1 again and see if it is possible to renegotiate the payment terms.
6. Do not continue to borrow!
This is the most important point of all. If you are determined to pay off your debts and avoid a dire situation, you must stop acquiring more debts or it will be a circle from which you cannot leave. On the contrary, it is time to look for additional sources of income, such as selling some belongings or looking for an extra job.
Have you decided where you are going to start eliminating debts?