Let’s cut straight to the point. Being in debt isn’t fun. Instead of enjoying life to the fullest, you lose sleep at night or work long hours to boost your paycheck. Both activities take a toll on your health and don’t help your situation any. Thankfully, it’s possible to get out of debt fast!
Some of these changes might seem radical as you must change the way you value money. It’s easier than you think to get out of debt. Trust me, don’t wait for the debt collectors to start calling. The time to start is now!
Getting out of debt fast doesn’t happen by accident. If you only continue to do what you’ve done your entire adult life, you may never get out of debt. Borrow, pay off, repeat… With this mindset, it’s no surprise that so many people live paycheck to paycheck and one large expense away from financial disaster.
Step 1: Make a List of All Your Debts
The first step to getting out of debt is knowing how much debt you have.
First things first, write down a list of all your current loan and credit card payments. To make sure you don’t overlook any loans, compare your list to your free credit report.
Once all your loans are written down, list them in order of the highest interest rates first. Credit cards and personal loans with an interest rate of 10% or higher should be at the top. This is the debt you always want to focus on paying back first because it’s the most expensive debt.
The sooner you eliminate this high-interest debt, more money can be applied to the borrowed principal. Reducing your remaining principal lowers your monthly interest payments.
Step 2: Sell Unwanted Items to Make Extra One-Time Payments
Another one-time hack to get out of debt quickly is to sell the items you’re still making money on. Of course, only sell them if you don’t need them or can easily substitute a lower-price alternative.
Some of the obvious examples are selling the “non-essential” items like your boat, jet ski, car with all the bells and whistles. Sell the item and apply the proceeds to the loan payment. Hopefully, the asset is worth more than the remaining loan balance so you can put some money in your bank account.
I did this with my car to get out of debt sooner. It was worth $20,000 and I bought a $7,000 replacement vehicle instead. My new ride isn’t as fancy, but I still get around town safely. We got out of debt sooner by applying the proceeds to our loan.
Step 3: Apply Extra Payments to Your Principal
For most people, getting out of debt fast means making extra monthly payments. Instead of making the minimum $500 monthly payment. You might give the bank $550 each month instead.
But, this additional $50 payment is only useful if it immediately reduces the monthly principal. Some banks credit extra payments to the next monthly payment, so you may only have to send in $450 next month.
Most lenders now give you the option to designate where your extra payment goes by logging into your online account. We did this to make sure our extra monthly mortgage and student loan payments instantly reduced our principal. You can also call your bank to make the switch too.
Once again, apply any extra payments to your highest interest rate first. Even if it’s only $10 a month, it’s a start. Continue to challenge yourself to increase your extra payment.
Step 4: Reduce Your Monthly Spending and Apply the Difference to Your Loans
If you’re struggling to find extra cash each month for larger payments, you need to look at the whole picture. That means separating your “needs” from your “wants.”
Some suggestions to boost your disposable income include:
- Canceling your cable tv subscription (switch to a $10/month streaming plan instead)
- Reducing your monthly cell phone data package
- Cook your meals instead of going out to eat
- Put your credit cards in a drawer to remove the spending temptation
I like Ask Trim because they provide a list of all your monthly subscriptions. For free, they also cancel any unwanted subscriptions you no longer. Finally, Trim compares your current cable tv, internet, and phone plan prices to the best carrier promotions. If you’re overpaying, Trim automatically applies the best discount to your plan to instantly drop your price.
You can also cancel your monthly subscriptions until you get out of debt. Once you no longer live paycheck to paycheck, you can afford to buy more “wants” and not worry about making ends meet.
Step 5: Negotiate a Lower Monthly Payment
After you reallocate your spending, it’s time to lower your interest rate. The trick is lowering your interest rates with your current lender. If they don’t want to lose your business, they will be willing to reduce your interest rate.
Negotiate Your Credit Card Debt
After throwing every free dollar you have toward your credit card balance, you may only need a few months to repay your balance in full. If so, try calling your credit card company. Ask them if they can offer a lower interest rate for the remaining months until you pay off the current balance.
Step 6: Refinance Your Debt With a Lower Interest Rate
Your final option is to refinance or consolidate your debt. This suggestion requires a credit check so you will need decent credit to qualify. If you can save hundreds or thousands of dollars by getting a lower interest rate, it’s well worth the credit check.
Transfer Your Credit Card Balance
I only recommend this option if you can responsibly manage a credit card. And, if the 3% balance transfer fee is less than your interest savings. Maybe you’ve heard of balance transfer credit cards.
Instead of paying 20% interest on your balance for 15 months, you can make interest-free payments during the promotion. Let’s say you get approved for a 15-month 0% balance transfer promotion. If you transfer your $10,000 credit card balance with a one-time 3% balance transfer fee, you pay $300 to transfer the balance. But, you don’t pay any interest for the first 15 months. This saves you $2,800 in interest charges because you don’t pay 20% interest on your current credit card.
Consolidate Your Debt
When you have high-interest credit card balances or medical debt, you should apply for a debt consolidation loan. Your bank or credit union might call this a personal loan. Only apply for this loan when the interest rate is lower than your current interest rates.
This loan is a good idea if it’s going to take longer than the 0% balance transfer period to pay off your debt. Even though you have to pay interest from the start, being able to reduce your interest from 20% to 10% APR instantly halves your annual interest charges.
Since consolidation loans are a fixed credit account, you can add to the loan balance like balance transfer credit cards. These types of loans can erase the temptation to spend if you want to cancel your credit card accounts.
Refinance Your Student Loans or Mortgage
You might qualify for better interest rates today than a few years ago for your “smart debt” like student loans or a home mortgage.
Because future loan interest rates are more likely to increase, apply for a fixed interest rate loan. The key is choosing the shortest repayment term with monthly payments you can afford. Shorter loans get lower interest rates. You can even combine multiple loans into a single refinanced loan if you choose.
If you have a 30-year mortgage, you might refinance for a 10-year or 15-year mortgage instead. We have more tips on how to pay off your mortgage faster.
And, only do it if you will pay less in interest and fees than with your current loan.
A Quick Tip About Refinancing Student Loans
When you have federal student loans, refinancing for a private student loan might not be your best option.
Privately refinanced student loans can have lower interest rates, but you forfeit loan forgiveness and deferment benefits that private lenders don’t offer. If you don’t plan on using these benefits, proceed with private refinancing.
Another option is to consolidate your federal loans. But, you won’t save any money because the repayment term is extended and your interest rate is 0.25% higher than before.
Between the slightly higher interest rate and taking more than the standard 10-year repayment term to pay off your loans, most borrowers spend more money than before.
Only choose this option if you can’t afford your current monthly payments.
If you want to get out of debt fast, think simple. Look for ways to reduce your monthly spending to make larger extra monthly payments. Also, sell valuable items you no longer need to make a large lump-sum payment.
When these two measures aren’t enough, look at lowering your interest rate by negotiating with the lender or applying for a new loan with lower rates.
What Steps Have You Taken So Far to Get Out of Debt? What’s Your Next Step? Let us know in the comments below!