Debt repayment plan is a careful, deliberate set of steps and arrangements you have put in place to pay off your outstanding debts. Borrowing money is not a bad thing, but allowing your debts to pile up could be damaging to your financial security.
Borrowing of funds for personal use and for investment purposes have been in existence for time immemorial.
However, taking high interest loans could make you pay a lot of money in interest. One could borrow money to fund their education, fund their medical bills, buy cars, or house and invest in business. All these loans must be paid back with interest.
Therefore, you will need a carefully set plan of actions to settle your debts. It’s always a good idea to draw a debt repayment plan.
A debt repayment plan will help you take charge of your financial future if you follow it up strictly. When you set up a debt repayment plan, you also set a target on when you will round up with paying your debts. This plan will motivate you to work harder to achieve your journey to a debt free life.
A debt repayment plan will help you to cut down on wasteful spending. It will enable you to channel your resources appropriately. With your plan, you might even find out ways of lowering your interest rate and take on more income sources to pay off your debts.
How Does Debt Repayment Plan Work?
Setting up a debt repayment plan works to give you a plan of action towards settling your outstanding debts. You need to take certain steps to achieve this. Your plan should be anchored on your current financial status. Your plan should:
1) Take accurate account of all your debts. Ensure that all your outstanding debts are accounted for. Do not leave out any. If possible make a list on spreadsheet and list all of your debts. You can manually write them down, but do not depend on your brain to hold the list for you.
Write them down in order of their urgency and the ones with a higher interest rates first.
Also note the total of all your debts, what your monthly payment is and how long you will take to clear such debts. These will help you come up with an efficient payment strategy.
2) Cut down on your monthly expenditures. You will need to cut down or reduce how much you spend monthly in order to have more money to channel into servicing your debts. You can arrange your needs in order of preference and cut out the expenses that are not needed.
You can cut off your Netflix subscription, trim down your grocery list to the bare essentials, cut down on drinks and parties etc. to save up money to channel into your debts.
3) Lower your debt costs. You will also have to find means of lowering the interest rates of your debts. This will automatically reduce your debts. You can negotiate with your creditor to lower the interest rate. Or you can use a balance transfer credit card with has lower interest rate to settle your debts.
The primary objective is to find out a means of reducing the interest cost on your mortgage debt in order to reduce the total debt.
4) Choose a repayment strategy best suited for you. You are expected to choose a strategy that works for you. The two popular strategies include Debt snowball and Debt Avalanche.
In Debt Snowball, you start with paying off the smaller loans first while paying minimum amounts on other debts. The goal is to start from the smaller debts as it motivates you to continue the payment when you notice how fast it takes to clear such small amounts first.
Debt Avalanche method focuses on paying the debts with a highest interest rate while paying minimum sum in the other debts. This method tries to save money by settling the debts with the higher interest rates to avoid a buildup of bad debts.
Debt Repayment And Debt Management
While debt repayment plan includes all the personal strategies you have put in place to manage your debts a debt management plan is a type of debt repayment plan itself. The debt management plan can be created and managed in your behalf by a credit counselor.
You can come up with repayment plan on your own. But if you work with a credit counselor, you will pay for their services. In as much as you have more freedom with the debt repayment plan you have made for yourself, having someone help you in drawing up a debt management plan gives you added support.
A professional credit counselor who is well versed in debt management plans will be more effective because they know more than you do when it comes to managing debts. Also, they may have an already established working relationship with your creditors and may bargain for better interest rate and conditions of payment, but you will pay them for their services.
Setting Up A Debt Repayment Plan
1) Make a list of all your debts. Making a list of all your debts is the first step in setting up a debt repayment plan. This gives you an idea of the total amount owed, the interest rates, the expiration date of each one so that you can know how to channel your money.
2) Arrange the debts in order of importance. You should take note of the most important debts to pay first based on their interest rates, the creditors and even the amount involved. Experts however, suggest that the smallest debts be paid first so as to create a momentum.
Seeing how fast your debt obligations are reducing will give you the motivation to carry on they argued. Other schools of thought suggest paying off the debts with a high interest rate so as to save money on interest.
They argued that instead of piling up more debts in the interest rate, you should pay them first and save your money. The money saved can be used to settle other smaller debts. You are however free to make your own choice. The most important thing to stick to the choices and the list you have created
3) Find extra money to pay your debts. You can take on a part time job to augment your income and have extra money to commit towards settling your debt. Additionally, you can work overtime, save your bonuses or tips towards settling your debt.
4) Pay one debt at a time. As you have set up a list of your needs in order of importance, you should now work towards settling one debt at a time. Stick to your repayment plan.
5) Move on to the next debt. When you sort out the first debt, move on to the second one. Maintain same energy throughout the payment period. Continue like this until you have sorted all your debts.
6) Save for the future. Once you have canceled all your debts, then you should start building up a savings account. This will give you an edge in life and prevent you from incurring more debts. This will give you control over your finances and help you become financially independent.
Techniques Of Debt Repayment
1) Debt Avalanche: Like we said earlier, debt avalanche places emphasis on repayment of debts with the highest interest rates while paying the minimum required amount for other debts.
Here, the debts with the highest interest rates are settled first and just like an avalanche, the debtor tumbles down to the second priority and keeps tumbling down until he gets to the last debt. This method saves money.
2) Debt Snowball: This method advocates one to start paying off debts with the smallest amount of debt in the list. In this method, you can end up paying more in interest rates and ultimately, end up paying a lot more than he should if he used the avalanche method.
3) Debt consolidation: Debt consolidation is the act of taking out a larger single loan to pay for other smaller loans. This is most helpful when someone is paying for higher interest rates. Debt consolidation can lower the total repayment amount.
4) Debt settlement: This is a form of debt management technique where the debtor negotiates for a reduction in the total amount of money owed. This is usually done to assist the debtor in clearing their debts.
A debtor through a credit counselor can approach the creditors to negotiate for a reduction in debt especially if the total amount is overwhelming. Most creditors will be willing to negotiate instead of losing out completely.
5) Declaring Bankrupt. Bankruptcy is the state or condition of not having enough money to pay back what one owes. It is the inability of a debtor to pay his creditors. When one declares bankrupt, the court will find effective means of sharing the debtor’s assets to the creditors to cover the debt.
Loan Repayment Calculator
The debt repayment calculator computes and estimates the size of a debtor’s financial obligations. The monthly payments and the annual salary required to be able to pay off such loans. This tool is used to estimate the length of time it could take to pay off a debt.
Depending on the information you provided in the calculator, it will automatically calculate everything and show results. Most online calculators ask for loan amount, interest rate, loan terms, minimum payments etc to calculate the amount of time it would take a debtor to pay off debts.
Finally, these plans cannot work without the effort of the debtor. You can plan all you want, but if it is not backed by action, it becomes futile. The debts will remain there. Sometimes, you will have a hard time getting more loans as the creditors will likely refer to your credit history as not being good enough. Debt repayment plans are made for unsecured personal loans.
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