The thing with taking loans, whether it’s a credit card, personal, or mortgage, is that you pay it back with interest. That’s how lenders manage to keep their businesses profitable.
If you’ve ever borrowed money that comes with interest, you already know how tough it is to pay back the difference. The debt burden gets even worse when the loan comes with a steep interest.
A high-interest debt can pose a serious risk to your financial future if you’re not careful. So, how do you tackle this seriously disastrous debt and secure your financial wellness?
Read on for practical tips.
- Understand How Indebted You Are
The first step to tackling a high-interest debt, or any debt for that matter, is knowing the extent of these debts. You simply don’t want to write monthly checks without a clear roadmap.
You want to review all your debts and the interest you pay for each. Single out the high-interest debts in particular as the top priority, and if possible, channel more money set aside for repayment to the high-interest debts.
This strategy lets you direct all your energy into getting rid of the more serious debt first.
- Consult a Professional
Getting out of a debt is hard, but getting out of a high-interest debt can be unbelievably challenging. Keeping in mind that everyone has unique circumstances and abilities, a generic repayment plan may not work for you.
If you’re not sure how to best approach your loan in a way that gets it paid while maintaining your financial stability, you’re better off working with a professional.
A financial planner can help you set up wealth goals and develop debt repayment strategies tailored to your needs.
- Cut Down Your Expenses
As you figure out your debt situation, use that opportunity to review your entire income and expenses. This will allow you to see where your money goes and what opportunities you have for adjustments.
It would make sense to create a budget that eliminates unnecessary expenses, allowing you to channel the extra funds to your debt.
- Take Advantage of Consolidation
Debt consolidation involves borrowing more money to repay the existing debts. When put that way, it sounds quite as productive as a dog chasing its tail.
However, there is a strategy to consolidate debts that can actually save you a lot of money in the long run. First of all, borrowing a large sum to pay off several existing debts allows you to focus on just one debt and plan for it accordingly.
Whether you have one or more high-interest debts, the strategy is still relevant to you. The idea is to watch for low-interest loans or lenders offering promotional rates.
For example, credit cards normally charge ridiculously high interest rates, with an average of 28.02%. By taking an unsecured personal loan with an 11.31% average interest rate, you can pay off the credit card debt, replacing it with a low-interest personal loan.
- Take Small Steps
Paying off a debt that doesn’t seem to end can be pretty demotivating because you can’t clearly see the milestones.
That’s where the snowball strategy comes in. In this strategy, you start by settling any smaller debts while maintaining minimum repayments on the high-interest one.
Before long, you will have all the small debts settled, boosting your motivation. And since you already have momentum, you can ride on it until you finally clear the high-interest loan.
- Stop Borrowing
It’s easy to find yourself stuck in the vicious cycle of borrowing and repaying loans. That problem is more common with credit cards, where you continue to accumulate more debt because what you make already goes to repayments.
Whether you have a high-interest debt or not, working on stopping this unsustainable habit is crucial.
A strategy to avoid getting into more debt while paying off others is to create an emergency reserve. Throw any bonuses or extra cash into this reserve to build it up.
With time, you will have a sizable amount in your emergency reserve to keep you off small debts.
Final Thoughts
Paying off a high-interest debt can seem like an uphill task with no end in sight. But like any other debt, you can settle it fast and focus on growing your finances instead of dealing with interest. All it takes is understanding where you are financially and creating a repayment strategy.
