In this article, we will discuss some of the first steps you can take to develop an effective repayment plan to get closer to being debt-free. We will go through what you must consider when you assess your debt and analyse your budget, so that you can set a reasonable and effective repayment strategy. We will also discuss some other resources available on the loan repayment landscape, such as loan consolidation, loan refinancing, and loan comparison.
If you are looking to kickstart your journey towards debt freedom, read on to learn more. Alternatively, you can check out our guide here, where Enklare explains early repayment.
Steps to developing an effective repayment plan
The first steps you take when you decide to tackle your debt are always the hardest. You may wonder what debt terminology means, how you got yourself into the situation to begin with, and how to start. With organisation and information, you can overcome your feelings of guilt and confusion, and develop an effective repayment plan.
Assess your debt
The first thing you must do is to assess your debt. Gather all relevant details on your outstanding debts, such as the debt type, your balances, interest rates, repayment schedules, and the minimum monthly repayments that you are making. Having a clear view of your debt situation is crucial for you to get out of it.
Set clear goals
When you have a good grasp of your debt situation, you can begin to decide on the goals you want out of your repayment timeline. Perhaps you want to speed up your existing schedule, or you are interested in refinancing your loan to get better repayment terms. You may also have multiple existing loans that you want to consolidate to decrease your management burden. Whatever your goals are, it is important that they are reasonable and tangible.
Analyse your budget
A budget is crucial for gaining control of your finances, and setting a budget can help you understand your income, expenses, and savings. This makes it easier for you to make informed decisions about debt repayment, as you will then have a clear financial roadmap to allow you to allocate your funds wisely.
You should first determine your income after tax. You should also track your expenses. One way to do this is to divide all expenses into fixed and variable categories. In the fixed category, you will have your monthly fixed expenses, such as your bills and rent or mortgage. In the variable category, you will have groceries and entertainment expenses. If you are unsure of what your budget should be, you can use an app and analyse past bank statements, receipts, and credit card statements to give you an idea of what your previous spending patterns.
You should also calculate your savings. You may have an emergency fund, where you put away money in case of a rainy day. This should be part of your budget when you are allocating your income each month.
Set a debt repayment strategy
Once you have a clear idea of your budgets and goals and financial situation, you can begin to form a debt repayment strategy. There are a few ways to do this – the snowball method, the avalanche method, or the hybrid approach.
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The snowball method involves paying off debts in order of smallest to largest balance. This is a psychological approach that provides quick wins and boosts. As each debt is paid off, the funds previously allocated to it are rolled into the next debt, creating a snowballing effect and momentum towards debt freedom.
The avalanche method is to pay debts off in order of highest to lowest interest rates. This approach minimises the overall interest paid over your journey to becoming debt free. It may take longer for you to see tangible results, but it can potentially save more money in the long run if you have racked up some debts that have very high interest rates.
You may also take a hybrid approach, which combines the elements of snowball and avalanche methods. You can focus on paying off smaller debts first for the psychological boost, while also being mindful of high-interest debts to minimise interest costs. There is no one-size-fits-all approach to debt repayment, and you should select an approach that works best for you based on your financial situation and goals.
Additional strategies and resources
If a traditional debt repayment strategy is not for you, you may consider other strategies that are a little more complex, such as debt refinancing or debt consolidation. These can be helpful if your credit score has improved since you took out your first loan, or you are having trouble managing multiple loans and their varied repayment schedules.
Debt refinancing
Debt refinancing is the process of obtaining a new loan with better loan terms and using this new loan to pay off existing loans. It can be a good part of your repayment strategy if you find yourself having an improved credit score over time – which means finding yourself eligible for better loan repayment terms over time.
Debt consolidation
Debt consolidation involves combining multiple debts into a single loan, and it can be a good part of your repayment strategy if you find yourself being overwhelmed by the different loan repayment schedules that you have. The purpose is to simplify debt management, which can potentially give you the ability to lower your interest rates paid.
Working with a loan comparison provider
For debt refinancing and consolidation, individuals must take out a new loan to refinance or consolidate multiple existing loans. In this case, it would be beneficial for individuals to do a bit of research to find the best loan for them. For many, this is an added challenge – and this is where working with a loan comparison provider often comes in.
Loan comparison providers are platforms or websites that allow individuals to compare various loan options from different lenders. These providers offer a convenient way for you to compare loan terms, fees, and interest rates. Usually, this allows potential borrowers to have a more transparent view of the entire market in their region without biased information, ultimately allowing them to pick the best loan for them.
Final words
The journey to debt freedom may seem daunting at first, but it is a worthy pursuit. With an understanding of your financial circumstances and by establishing a thoughtful repayment strategy outlined above, financial freedom is entirely within reach. Once you have a plan, remember to stay committed, remain focused, and ask for help from professionals when needed.
