Why Debt Repayment is Necessary? And Which to Pay First?

Is debt payment necessary? Everyone knows that all debts must be repaid in a timely manner to get rid of increasing interests and other related expenses. However there should be a balance between debt payment and savings to achieve your financial goals in a sustainable and effective way. Many people are confused what to do and how to proceed. This confusion crates many distractions and force you to make some wrong decisions.

Debt is necessary thing for many people  

As far as several people are concerned, debt is an inevitable part of modern life. For buying a house, purchasing a vehicle, credit card purchasing and raising find for the education of your children, you have to rely on different types of loans. When you take a loan, you become a debtor. There are many more ways which make people debtors and they include refinancing, raising funds for treatments, buying household items and more.  No matter whatever type of debtor you are; you have to pay off the debts as soon as possible to prevent from ending up in a large crisis.

What makes debt repayment necessary?

Easy Debt Management

The best answer to this question is that as debts keep on accumulating, you have to pay a huge amount of money to lenders. You can find several people being dragged into legal battles with lenders. This situation results in the repayment of high interests, large penalties and other types of compensations. You should not allow this to happen and follow a balanced approach to repay debts. Eminent financial planning experts offer the best advice for people on how to manage debts and repay them effectively. If you are in a different crisis, you have to figure out a way to get out of it. A good repayment strategy teaches you how to prioritize your debt payments.

Learn how to prioritize your debt payment is the key

When it comes to repaying debts, many people don’t know how to adopt a systematic and balanced approach. As mentioned earlier, they can seek professional help to take the most suitable decisions based on their unique financial situation. The key is to know how to prioritize your debt repayment. Paying off a debt can be a long term process based on how much obligations you have. Some people easily get fed up and they often give up especially when there are too many things to handle. This approach forces them to face serious consequences later. This is not the way to go forward. You should create a well thought out plan to pay your debts. Prioritizing the debt payment is extremely vital. Best repayment methods come up with the most effective way of prioritizing payments.

Learn about different debt reduction strategies and understand which one to pay first  

Paying off a loan is one of the most satisfying experiences for any individual. You should learn which one to pay first when you have a good number of loans to be repaid. A strategic approach is what you need to follow. That is where the importance of learning about different types of debt management strategies comes in. When you are familiar with different types of strategies, you can choose a suitable one based on your needs in an easy manner. Since you cannot pay off all debts at once, you should know which one to pay first. This awareness is extremely vital while dealing with a debt crisis.
Start your debt repayment journey by deciding on good and bad debts

Keep on borrowing money is not a good habit. However you are living in a world of money lending and credit scores and you need to realize that certain debts are better than others. For example; education loans, business loans and mortgages are always considered as good debts. What makes them good debts? When you take those loans, you are making investments in yourself or in assets. There are bad debts as well. Personal loans, pay advance loans, credit card debts and similar types of debts are considered as bad debts. When you are having these types of financial obligations, you cannot expect any special benefits or rewards out of them.

Pay off bad debts first before thinking about good debts

All types of debts should be paid off at some point of time or other. However the priority should always be given to bad debts. You can definitely consider putting the good debts on the back burner while preparing a debt management plan. It is necessary to find solutions to all your bad debts first before seriously considering the repayment of the good debts. This suggestion does not mean that you should not completely ignore the repayment good debts. Priority must always be given to bad debts. You can keep on making minimum payments on your good debts until you settle your bad debts.

Create a spreadsheet that contains all relevant information

If you want to keep track of everything in a systematic way, you should create a spreadsheet containing all relevant details. The amount of each debt should be gathered and recorded on the spreadsheet. You have to classify the type of debt for the prioritization process. Another important aspect is to write down the individual interest rates. If there is any credit limit, you have to add this on the sheet. Last but not the least; the term of each loan has to be recorded as well. When you have all these details at your disposal, you can keep track of things in the best possible way.

An overview of different debt repayment approaches

Various financial planning experts have designed different types of debt repayment approaches to suit the varying needs of different people. Generally speaking, debt repayment strategies can be classified into two categories. The first one advocates the importance of dividing payments across all your debts equally. The second one recommends people to focus on one debt at a time while making minimum payments of other debts. Various authentic research studies show that focusing on one debt at a time is more effective that spreading focus on all debts at a time. It has been found that people, who concentrate on one debt at a time, manage to pay off debts 15% faster than those who make equal payments to all debts. Debt repayment approaches can be divided into three different methods. The first method of approach advocates the importance of paying down debts on the balance. The second approach advises people to pay off debts depending on the interest rate. A certain group of experts are of the opinion that debts need to be paid off based on the available credit. No matter what type of debt repayment approach d you follow, the ultimate objective is to pay off all loans as soon as possible to achieve financial independence. The most feasible way is to chip away larger portions of one bad debt at a time while keeping on making minimum other debt payments.

Learn more about paying debts on the balance – Snowball Method

Paying off debts on the balance is known as the snowball method. According to this debt repayment approach, repayments keep on mounting as you manage to get momentum. The fundamental theory is that one has to begin the repayment process with the debt that comes with the least balance. This theory advises people to concentrate on repaying it first and settle it prior to selecting the next one with smallest balance. For instance; if you have three debts to be repaid, your prime focus should be one the smallest debt while making minimum payments on the other two. When it comes to making payments for the smallest debt, you need to pay as much as you can to finish it as fast as possible.

The most prominent advantage of paying debts on the balance is the excellent reward that comes immediately. You can find several people complaining about debt repayment as a thankless process that never deliver the expected results. This feeling arises when you keep on paying equally on all debts for a very long period of time. On the contrary, when you apply complete focus on the smallest debt and settle it fully within a short period of time, you can experience a sense of fulfillment. This feeling keeps on motivating you pay off other debts with more enthusiasm. In order to make this approach optimally successful, you need to ensure that the same amount of money is applied to remaining loans as you tackle each debt. This is how you can gain momentum and pay off all your debts in a fast manner.

Information on paying off debts based on the interest rate – Avalanche method

Tackling debts on the basis of the interest rate is called the avalanche method. This method advocates the importance of paying off loans based on interest rate. When you have a good number of debts to be dealt with, the first one you need to focus must be the one with the highest interest rate. Your focus needs to be on one debt at a time while you have to continue making minimum payments to other loans. Maximum amount should be paid toward the high-interest loan every month. If your first priority is to get rid of debts instead of saving money, the Avalanche is a highly effective choice. One of the limitations of this method is that although it helps you save more money, you often do not get the much needed motivation to go on paying off debts with great enthusiasm. If you have to deal with high-interest debt with a large balance, you may have to wait years to achieve the results you want. Some experienced financial planning experts advise people to follow a combined approach to achieve the expected results faster. A combined approach blends your interests toward reward motivation and money consciousness in a harmonious way. It is always advisable to start by following the Snowball method. After paying off a few debts on the basis of balance, you can move to the Avalanche method and start paying down loans with high-interest rates.

Paying off debts on the basis of available credit

If you are planning to have an expensive purchase in the future, you need to strategize to achieve your objective. It is different approach compared to the other two approached mentioned above. Since you are focusing on a future purchase like buying a car or house, your priority needs to be on developing a good credit score. It considerably increases your chances of getting a future loan approval. This method puts forward an approach where you are paying down every credit card to ensure that you are utilizing only 30% of your available credit. It is always advisable to concentrate on the credit cards that are approaching the maximum limit because they influence your credit score in a much bigger way.

Which method is the best option?

There is not a hard and fast rule that can be applied to point out the best method. Each method has its own advantages and disadvantages. Yours situation is the one that makes a method wrong or right. It is your discretion to choose a relevant method that helps you get out of debt crisis in a fast manner. If you choose a method that fits your current situation, you can make a steady progress and achieve the expected results in a systematic way. When you start paying off debts smartly, you are getting closer to your other financial objectives. There are mixed opinions about debt repayment strategies among financial experts. As discussed earlier, some financial planning experts advise their clients to follow Snowball or Avalanche method to meet their needs. Some others are of the opinion that various methods can be blended in a harmonious way to address a debt crisis in the most effective way. It is always advisable to design a roadmap that you are comfortable with.

You cannot find a way out without paying off all debts. So debt payment is a necessary thing. How to pay off debts? This is the most important question. You have to design and develop a fully customized repayment strategy based on your unique situation. Experienced and reliable financial planning experts help you choose the right method of approach that guarantees excellent results. The most preferred course of action is to focus on one loan at a time while making minimal payments to all other loans. You can choose to prioritize on the basis of balance or interest rates. Your current financial situation needs to be carefully analyzed before choosing a debt repayment strategy.

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