How To Deal With Debt
When it comes to debt it is very easy to know that you have a problem but do know just how big that problem really is?
You might be surprised to find that a very significant proportion of those people with debt problems have no idea how much they actually owe or how much in total they are paying out in interest on their accumulated loans each month.
The first step in dealing with debt therefore is to work out just how big the problem is.
Sit down and list out all the debts you currently have, detailing how much of the original debt is still outstanding and how much you are paying each month. You should also separate out each payment to show how much of the payment represents a repayment of the original loan and how much is simply interest.
You might well be shocked by what you find, not just in terms of how much you actually owe, but in terms of how much of your monthly income is simply being used to repay interest. For example, if you are earning $3,000 a month and are paying $150 a month simply in interest charges this means that you are paying out 5% of your monthly income without actually reducing the total amount you owe. If this sounds bad enough, then take it one stage further. If $150 is the maximum you can afford to pay each month then you can go on paying this for years without your debt going down at all.
Hopefully the balance between the amount you are paying in interest and the sum going to repay the principle of your loans will be reasonable and it is difficult to say exactly what this should be as it will vary from one loan to the next. In a typical home loan for instance it is not uncommon to be paying 90% interest and 10% principle in the early years of a mortgage, but you certainly do not want to be doing this with your credit card debt.
Having worked out the extent of the problem the next thing you need to do is to draw up a plan to pay down your debt as quickly as you can. Here you will need to work out how much in total you can afford to pay every month and then decide how this money should be applied to your various different debts.
One solution is sometimes referred to as the ’snowball’ approach and involves paying off your smallest debts first. Once these are cleared you will then have more money to apply to the remaining debts and can gradually work your way up towards your biggest debt.
A second solution is to tackle the largest debt first and so save you the greatest amount of money in essentially wasted interest payments. This is not an easy method however and progress is slow making it difficult to stick to this particular plan.
Whichever plan you follow however you must not simply ignore one or more of your debts while you clear the others or you will fall foul of your lenders and adversely affect what may already be a damaged credit record. If meeting at least the minimum payment on all your loans is going to be difficult, or indeed impossible, then talk to the lenders concerned and see if they can help. They may well agree to assist you by accepting reduced payments for a short period, or even to waive your payments for a couple of months, if you explain your situation to them.
One final point. If you are in a mess and sitting down trying to work out how to deal with your debt, do not make matters worse by taking on any more debt. This might seem obvious but you would be surprised how many people try to borrow their way out of debt. This never works and simply makes a bad situation even worse.
