It can be difficult and take a lot of time to pay down your debt, unless you come across a huge windfall. However, if you’re like most people, you probably don’t have a lot of extra cash laying around to deal with your problems. Even without a huge windfall, it’s still possible to become debt free! It just takes some discipline and creativity but it is possible and incredibly rewarding. You can even automate your payments to remove some of the discipline.
Let’s talk about the few main methods to pay down your debt ahead of time. Just remember that every strategy requires a payment more than the minimum required. If you have trouble finding extra money, there are plenty of useful tools that can track your spending and help create a budget to pay off debt such as Mint and You Need A Budget. A budget will help you know where your money is going and prevent overspending. You can still have fun with a budget but in a smarter and more responsible way.
The Snowball Method
The first popular method for paying back debt is the snowball method. It is called so because you slowly pay off debt based on the size of the loans. Using the snowball method you make all your minimum monthly payments. After that, you put extra money towards paying off the loans with the smallest balance first. Once the smallest is paid off, you can start paying off the next smallest balance. The snowball method is motivating because it starts getting rid of loans quickly and it is easier to monitor progress.
The Avalanche Method
The avalanche method is my personal favorite, because it helps you save the most in the end. This method is similar to the snowball method, but instead of putting extra payments towards the smallest balance first, you pay off the loans with the highest interest rates first. This method saves you the most money because it starts paying off the highest interest loans faster. Those loans will accumulate the most interest over time, so it's great to get rid of them first. The difference between a 3% loan and a 4% loan over many years can be huge.
Other ways to pay off your debt
Other useful methods of dealing with debt is transfer balances to lower APR credit cards or loans. There are many 0% APR options depending on your credit score and history. Using this method enhances the avalanche method because you can focus more resources on higher interest rates. This strategy can also work with the snowball method if you transfer the higher balance debt to lower interest rates and focus on paying off the smaller balances.
Another option for those with student loan debt is to refinance to an income share agreement (ISA). This instrument is debt-free to begin with, so refinancing will remove your debt immediately. With an ISA, you share a percent of your income for a set period of time and then you are free. The payments are always affordable because they are tied to your income. Interest never accumulates and you don’t have to make payments if you don’t have income. The ISA is the best solution for those struggling with student loan debt. Currently, only Defynance offers a student loan refinance solution that utilizes ISAs instead of debt.
