When to Consider Debt Repayment

When to Consider Debt Repayment, June 2021

The concept of debt repayment is simple enough: debt repayment begins when you pay back the money you borrowed from a lender, and this could include personal loans, credit cards, student loans, mortgages, and so on.

Although it is a word that has taken on a negative connotation for many people, debt is not necessarily a bad thing.

In a situation where loans or credit are borrowed in good faith, and a person is confidently able to pay the debt back as either a periodic payment or a lump sum, debt can be a worry-free experience. 

However, life does not always go as planned. Circumstances arise, whether it be something like an emergency, an unexpected change in income, or an ongoing habit of spending above a person’s means, and then debt can accumulate.

In these scenarios, debt becomes more difficult to repay. It quickly turns into a source of financial and mental stress, especially when you are faced with consequences like late penalties and a plummeting credit score. 

So the question becomes, when should you consider debt repayment? In an ideal world, the answer to that question is “always” and “as soon as possible”, but we all know that certain situations make this easier said than done.

In this article, I am going to go over a few factors to think about if you are grappling with debt repayment, and if you want to make a manageable plan to pay back what you owe. 

Tip #1: Use a Debt Repayment Calculator

For many people who are beginning to feel overwhelmed with debt repayment, a debt repayment calculator is a great place to start.

These easy to use platforms help individuals get an overall picture of how much debt they have, and what a realistic timeline is for them to repay the money that they owe.

When you use a debt repayment calculator, you will need to make individual calculations for each loan you owe.

Simply input the balance you owe and the interest rate that debt carries.

Then decide if you want to include the amount of money you want to put towards that debt each month, or the number of months you would like to have the debt paid off by. 

From this calculation, you will be able to decide when you should begin to pay off each debt considering how long it will take you, how much money you are able to put towards it in periodic payments, and how much you will end up paying in interest.

You can play around with the calculator and adjust the payment amount or desired pay back period to discover what debt repayment plan makes the most sense for you.

Tip #2: Consider the “5 Year” Rule

When working to pay down debt, a lot of financial advisors will have you think about the following question: is it possible for you to pay off all your debts in five years or less, while still affording your current living expenses?

If the answer is no, it might be time to consider professional advice, and a debt relief plan that will help you repay your loans faster without compromising your finances in the process.

Reach out to a credit counselling agency, who may suggest debt consolidation or a debt management plan depending on your situation. 

Tip #3: Beware of Interest

When you are asking yourself when to consider debt repayment, you will absolutely want to familiarize yourself with the interest rates on your current loans.

The loans that carry the highest interest rates may be the ones you will want to pay off first. This strategy is called debt avalanching. 

Keep in mind that while you pay off these higher interest loans, you want to continue to pay at least the minimum payment towards your remaining debts to avoid an even more costly situation. 

As well, this strategy takes discipline, as it is not the fastest way to pay off debt. Although it makes up for that by saving you the high compound interest charges these high interest debts can accumulate.

Tip #4: The Snowball Effect

When you have a number of debts that you need to repay, it can feel like a never ending battle. Consider the snowball strategy to make debt repayment feel more manageable. 

Again, you will continue to make your minimum monthly payments on all your debts, but in this strategy, you prioritize repaying your smallest debt first. 

Once that smallest debt is paid, you move on to conquering your second smallest debt, and so on. 

However, it is a highly motivational strategy, as you can pay off small debts off fast and feel rewarded by that success.

Tip #5: Ask Yourself, is the Debt Secured?

Secured debt is debt that is backed by collateral. An example of this could be a mortgage (secured by your home) or a car loan (secured by your vehicle).

Until these loans are entirely paid off, the lender has the right to seize these possessions if they have evidence that you cannot repay your loans. 

On the other hand, unsecured debt does not have collateral, meaning that no assets can be taken from you for the debt.

These include credit car loans, payday loans, medical bills, or student loans.

When you are considering debt repayment, it is generally wisest to pay back your secured debt first. Neglecting these payments can put you at risk of losing your assets.

However, that is not to say that failing to repay your unsecured debts comes without consequence. You may face calls from debt collectors, late penalties, or court orders to compel you to repay. 

Tip #6: Maintain your Credit Score

If you have let your debt payments slide, consider this about debt repayment: by collecting and neglecting debt repayments, you are putting your credit score at risk of dropping.

How? A record of your debts and payment history is added to your credit report, and it directly influences your credit score. 

A low credit score can negatively impact your likelihood to be approved for future credit cards, mortgages, rental agreements, and low interest loans.

Some employers will check your credit score, too. So, in order to protect your credit score, it is best to plan to repay your debts as soon as you are able to.

The Bottom Line

While there is no fixed plan for debt repayment, you want to discover the solution that is best for you, as soon as possible, to avoid any further headache and negative impact on your finances. When in doubt, reach out to a non-profit credit counselling agency to help you get back on track. 

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