Paying off Debt isn’t always easy, but it’s worth the effort. Being in debt can have an effect on your mental health, as well as your savings goals and future plans.
Fortunately, there are some simple strategies you can use to help you get out of debt quickly and get your finances back on track.
In this article, we’ll look at the best way to pay off debt, and what options you have if you’re unable to pay.
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What are the different types of debt?
Debt is the result of personal circumstances, such as credit card spending, personal loans, and hire purchase agreements.
There are two types of debt: secured and unsecured debt.
- Secured debt requires the use of some form of collateral, such as property or an item of high value, as a guarantee for repayment of the loan. If the borrower is unable to make payments, the lender is entitled to take possession of the collateral or force its sale to recover the debt.
- Unsecured debt, on the other hand, does not require collateral and is more common. This includes overdrafts, payday loans, personal loans, and credit cards. The borrower promises to repay the loan in full, usually through regular payments.
These loans often come with higher interest rates due to the lack of security and additional fees for missed payments. Missing payments can also have a negative effect on one’s credit rating and could lead to insolvency or bankruptcy.
Problem debt vs. managed debt
When it comes to debt, you may hear the terms ‘problem’ and ‘managed’ debt. These terms refer to the type of debt you have, depending on your capacity to pay it off.
- Problem debt is used to describe a situation in which you are overwhelmed by debt, and your total debt payments exceed your income, making it difficult to repay.
- Managed debt, on the other hand, refers to debt you can afford to pay back, such as your monthly mortgage or loan payments.
What’s the best way to pay off debt?
The best way to tackle debt is to prioritise which of your debts are the most costly. Take a look at your repayment amounts and the interest rate. Debt with the highest interest rate is the most expensive, and paying it off first can give you the most relief.
The quickest way to pay off debt
The best way to pay off debt quickly is to prioritise the debt with the highest rate of interest.
If your debts have the same interest rate, you can tackle the largest balance first to make progress or the smallest balance for a quicker sense of accomplishment and motivation.
If you can afford to try and overpay.
Is it better to pay off debt or save money?
Choosing between paying off debt and saving money can be tough, as both are important. It makes more sense to prioritise paying off debt, as interest rates are usually higher than what you would earn on savings.
If you have debt and an emergency fund set aside, you might want to consider using the fund to pay off the debt and avoid accumulating interest.
Take a part-time job, cancel unwanted subscriptions and sell any unwanted items.
Can I get out of debt and save at the same time?
If you want to learn how to get out of debt and save money simultaneously, there are some things you should consider. As previously mentioned, it’s ideal to prioritise paying off your most expensive debts first, like credit cards or store cards.
If you have any extra cash, you might want to open a savings account that offers a competitive rate of interest.
Fixed-rate bonds usually have the best rates, but an easy-access savings account may be the better option if you need the flexibility to withdraw your savings whenever you want.
How can I get out of debt?
There are many options to get out of debt, the most frequent being debt consolidation and adjusting your budget.
You can make a new budget to help you pay the debt faster and more efficiently. With a well-structured budget and a dedication to cutting out luxuries, you may be able to get more money than expected.
That way, you can use a bigger portion of your income for debt repayment. In debt consolidation, you take out a new loan to pay off the existing ones.
This could be a great solution if you have a loan or credit card with a high-interest rate and payments you can’t keep up with. Applying for a loan to consolidate these debts can make your finances more manageable.
Five tips to get out of debt
If you’re looking for ways to get out of debt quickly, here are five tips to consider.
- Create a budget plan. This will help you track your income and expenses accurately and identify which expenses are essential and which can be eliminated. Doing so will free up more money to put towards paying off your debt.
- Paying more than the minimum payment requirements can help reduce the interest you owe and get you out of debt faster.
- Pay with cash rather than credit card. This will help you avoid incurring more debt and make it easier to pay off existing credit card debt.
- Sell unwanted items and cancel any unused subscriptions. This will generate some extra money you can put towards paying off your debt.
- Remove your credit card information from online stores. That way, you won’t be tempted to shop online and can instead channel more funds into paying off your debt.
If you’re already in too much debt and can’t manage it, you may need to take a more advanced step. These last-resort options should be used only as a last resort, so it’s best to come up with a plan to pay off your debt quickly before reaching that stage.
I can’t pay my debts - what options do I have?
If you don’t have any savings or enough money to pay off your debt, don’t worry – you still have some options available. These include debt management plans, individual voluntary arrangements, administration orders, debt relief orders and bankruptcy orders.
Exploring each option can help you decide which is best for you.
- A debt management plan is an agreement between you and your creditors to pay off all of your debts. Usually, these plans are used when you can only afford a small amount each month or when you’re expecting to be able to make repayments within a few months. You can make arrangements yourself or through a licensed debt management company.
- An individual voluntary arrangement (IVA)is an agreement between you and your creditors to pay off part, or all, of your debts. You would make regular payments to an insolvency practitioner who will divide this money between your creditors.
- If you have a county court or High Court judgment against you that you can’t afford to pay, an administration order may be the best option for you. If you meet the eligibility requirements, you can make a monthly repayment to the court, which will be divided between your creditors.
- Debt relief orders are another way to help you get out of debt if you owe a lender less than £20,000, don’t have much spare income and don’t own your home. A debt relief order stipulates that creditors cannot recover their money without the court’s permission and incurs a fee of £90. You may be discharged from your debts after 12 months if you can still not pay.
- A bankruptcy order may be your only option if you can’t pay off your debts. You must make an application to an adjudicator who will decide if you should be made bankrupt. During a 12-month period, any non-essential assets may be used to pay your creditors. At the end of this period, most debts are written off.
Be aware that declaring bankruptcy has a serious, long-term effect on your credit rating.
Bankruptcy will remain on your credit file for five years after your debts have been written off, making it difficult to get credit, run a business, get a mortgage or open a new bank account.
Does being in debt affect my credit score?
Debt can have a major impact on your financial well-being, including your credit score. If you miss a payment, the lender could report it to the credit bureaus, which could have an adverse effect on your credit score.
If you have high balances or frequently reach or exceed your credit card limit each month, this could also negatively affect your credit score.
Sell & Downsize
If you own a property, you can sell your home and buy a smaller house. By downsizing, you can release equity, which can be used to pay off your debts quickly.
We can make the process of selling your property seamless for you:
Property Saviour Price Promise
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