A lot of people have debt. And many Americans may wonder if taking out a personal loan is a good way to pay down debt.
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.
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. The amount of interest and the length of time make up part of what’s known as the terms of a loan.
Student loans are another very common form of debt. Used responsibly, loans 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 potentially saving you money on interest in the long run.
Ways to Pay Off Debt
- Debt consolidation. Outside of a credit card balance transfer, 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, which can be debt consolidated with a personal loan, can 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.
- What order should I pay off debt? There are also different 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.
- 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.
- Home equity loans. A home equity loan may come with a lower rate than you’re paying on a high interest credit card balance but it requires putting your home up as collateral to secure the loan. 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 and they’re unsecured.
- 401(k) loan. Some employers will allow you to borrow money from your 401(k) retirement savings plan. While this may offer an attractive interest rate, you may want to consider a personal loan versus a 401(k) loan. There may be drawbacks like missing out on gains or losing an employer match that may be deal breakers for you.
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.
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 extra funds to make those payments.
But life is often more complicated than that. And debt can pile up 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.
Other Ways to Cope with Debt
We usually think of our monthly bills as rigid payment schedules that our services depend on. But in today’s hyper-competitive business environment, many vendors, like cable and phone companies, are willing to work with you to keep your business.
Earning additional income through a freelance or side job is another way to tackle debt.
In today’s “gig economy” where people can sell products from their home or use their car for ridesharing and food delivery, there are a number of options available for very flexible part-time work. However, many people don’t have time to add an extra job. There are, though, still plenty of opportunities for extra income that can be used to help pay off debt.
Take a look around your apartment or house, and decide if everything you have is necessary. Chances are you can find a handful of items, at the least, to sell either online or through a garage sale. If you can’t find anything to get rid of, consider renting out your home or apartment while you’re on vacation. Just be sure to consult local laws and check with your property owner before advertising your space.
You may also be able to find an online savings account that could pay you more in interest.
Hold Yourself Accountable
While there’s many methods for combating debt, you should always hold yourself accountable for these expenses. 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.