Like most indebted South Africans, you have to manage multiple accounts, credit cards and unexpected bills. You probably wonder how to pay it off quicker. Should you make minimum payments on all debts? What about saving money on accumulated interest? Can debt consolidation be your answer to eliminate debt?
Your debt payoff plan: Avoid paying only the minimum instalments
When you have only one debt to worry about, it’s easy to plan repayments. You only have to commit to one monthly instalment and interest rate. The more you pay back monthly to creditors, the faster you eliminate all debt principal and accrued interest.
Making only the minimum payments will take longer to pay off the balances, possibly months or even years, while accruing more interest than the initial debt principal.
It makes perfect sense to repay the maximum monthly fee you can realistically afford in your budget towards the debt, therefore avoiding paying the minimum instalment on your debt. You want to get rid of this debt as fast as possible.
When you juggle multiple debts, various high-interest loans, credit cards and retail accounts, you need to develop a different debt repayment plan that works in your favour. Your priority should be to minimise those growing interest payments. Therefore, making only minimum payments on each account is counter-intuitive.
Two ways to get rid of debt faster
You can eliminate debt faster by adding extra to your monthly instalments. To simplify, the two most popular strategies are the debt avalanche and the debt snowball methods.
The debt avalanche method is ideal for eliminating multiple unsecured debts like credit cards, where it is essential to reduce the amount of payable interest.
- Make the minimum payments required on all accounts.
- Add as much as you can towards the account with the highest interest rate until you finish this debt
- Repeat the process with the next high-interest debt until all debts are paid
In short, you will pay off all debt from the highest interest rate to the lowest one, reducing the accrued interest, and getting out of debt quicker, although it may take a while to gain momentum and see results.
The debt snowball method is recommended to cut off multiple debt regardless of the interest rate, from the smallest debt to the largest amount. It is beneficial when you’re struggling with too many debt accounts.
- Make the minimum payment required on all accounts.
- Add extra money, as much as you can budget, towards the smallest debt until you eliminate it
- Repeat the process with the next smallest debt until all debts are paid
By eliminating multiple smaller accounts with outstanding balances first, you get the added advantage of improving your credit score faster. However, unlike the debt avalanche method, you’ll end up paying more in interest over time if you are only going to eliminate those higher-interest accounts later.
The above debt repayment plans work well, among other possible strategies, assuming you make payments on time and manage your monthly spending accordingly.
If the debt becomes overwhelming or you are in danger of defaulting on payments, it is best to consider another option to ensure timely repayments you can afford at a lower interest rate: debt consolidation.
Debt consolidation and interest rates
For many indebted consumers, debt consolidation is the ticket to making various debt repayments manageable, even when you can no longer afford the minimum instalments.
If you struggle with debt, it’s best to consolidate debt under debt review instead of taking another consolidation loan that you barely handle.
Combining multiple debt accounts into one larger debt with a single interest rate simplifies debt management. But it also improves your monthly finances by renegotiating new affordable payment terms, including a preferential interest rate, which reduces the total interest paid over the initial period.
This is because interest rates for debt consolidation under debt review are considerably lower to almost zero. Debt consolidation interest rates are renegotiated as lowest as possible to cut down interest so that you can focus mainly on paying off the principal debt, without the burden of uncontrollable accrued interest.
Again, making only minimum payments on the new debt consolidation plan will take longer to repay this single debt, but it may be the only option you have available, depending on your income and credit affordability.
The debt counsellor in charge of the debt consolidation process will work within your budget constraints to set the most advantageous monthly payment schedule and find ways of paying the debt faster whenever possible.
Need help with paying off debt? Consult an ezDebt counsellor today. Our professional advisers help you stay on track with debt repayments through affordable debt counselling and debt consolidation management. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.