A lot of people have debt. And about 40% of Americans feel they have too much.
So, of course, most everyone wants to know not only how to pay off debt, but how to pay off debt fast.
You may have heard some incredible stories on the subject, such as the guy who paid off $50,000 by selling stuff online that he bought at garage sales and discount stores. Or the woman who paid off $96,000 in two years through “side hustles.”
These are probably extreme examples, and everyone’s life and financial circumstances are different.
In most cases, it’s probably more likely that to pay off debt in a relatively short amount of time, you need a systematic process and the right practical tools at your disposal.
Consider the following elements of paying off debt and you should be on your way to meeting your personal goals.
1. What is Debt and How Does it Work?
Debt is money owed to a lender (whether that’s a person or a business or the government) that you typically have to pay back, with interest, over a specific period of time. This is what’s known as the terms of a loan.
Used responsibly, it can help you achieve worthy goals like getting an education, having a nice place to live or consolidating other, higher interest debts into a loan with a lower rate, thereby actually saving you money in the long run.
2. Ways to Pay Off Debt
a. Debt consolidation
One increasingly popular way to pay off debt is through debt consolidation, particularly if you’re wondering how to pay off credit card debt with a high interest rate.
Debt consolidation loans, otherwise known as personal loans, allow you to pay off your creditors directly and then repay the loan on a monthly schedule with a fixed payment and interest rate.
Curious how much this could save you? Use our debt consolidation calculator for some savings examples.
b. What order to pay off debt?
There are also a couple strategies to consider when deciding in what order to begin paying off debt.
One is the snowball strategy, which means paying off debt with the lowest amount owed first and gathering momentum (like a snowball) as you work through these smaller payments.
The other is the avalanche strategy, which prioritizes paying off the debt with the highest interest rate first.
c. Debt settlement
This involves having a third party company step in and negotiate a settlement with your credit card company. While this could provide debt relief, it also comes with a number of risks, including having to make continued payments to the debt settlement company and even the possibility of getting caught up in scams.
d. Home equity loans
A home equity loan may come with a lower rate than you’re paying on a high interest credit card balance. This could be a good option if you’re also undertaking a large project such as a home addition, because home equity loans tend to be for larger amounts. For instance, at Discover, we offer home equity loans between $35,000 and $150,000, while our personal loans are for between $2,500 and $35,000.
e. 401k loan
Some employers will allow you to borrow money from your 401k retirement savings plan. While this may offer an attractive interest rate, there are a number of pitfalls, including missing out on gains from having the money invested, losing an employer match and having to repay the loan with after-tax dollars.
3. Itemizing Your Debt
Before you can be successful at paying off debt faster, you may have to do some accounting of what kind of debt you have and how much debt you have.
List out the following to organize your debt situation:
- How much you owe on loans, large bills (i.e., medical) and credit cards
- The amount of interest you are paying
- Your annual percentage rate
- Your minimum monthly payments
Put this information into a spreadsheet or somewhere that you can easily access to update in the future. The objective is to get your debt out into the open so you can begin the process of paying it down.
4. Figuring Out What’s Stopping You From Paying Off Debt
It would be easy to say that if you want to pay off debt fast, you should just save more money, or spend less, and use the remainder to make those payments.
But life is often more complicated than that. And debt can pile because of unexpected events – anything from a major medical situation to a leaking roof to a death in the family.
It’s very possible to make a good salary – relative to your industry, geographic location, etc. – and still have debt.
As part of this process, you want to ask yourself, why can’t I pay off my debt? Once you’ve figured that out, you may be ready to move forward quickly.
5. Hold Yourself Accountable
Like figuring out what’s holding you back from paying off debt, keeping tabs on yourself can be more difficult than it sounds. Of course you want to pay off debt in a timely fashion, but are you really monitoring your progress on a monthly or even weekly basis?
It’s important to set concrete deadlines and payment amounts. A personal loan could be helpful in this regard, because it would allow you to automate your monthly payments and you know exactly how long it will take to pay off the loan if you make those payments.
While it can be difficult to talk openly about issues related to money, another idea is tell a close friend or family member about your debt payoff plan. This may compel you to be more accountable to that person, and it may also serve as a source for moral support.
Paying off debt won’t necessarily be easy, but if you stick with it, you may find you can make a lot of progress in a short amount of time.