3 repayment strategies to deal with insurmountable debt

There are three debt repayment strategies when you are struggling with debt: debt avalanche, debt snowball and debt consolidation. Each of them has its own pros and cons and is suited to different circumstances.  

At some point in life, you may have some form of debt that you will feel inclined to get rid of as fast as possible. Before choosing any repayment strategy, there are things that you should do to set yourself up for success. 

• Create a list of debts. Some debts will be discharged in one fell swoop, whereas others will be paid down in fixed instalments. Know the cost of each debt, as it plays an important role in deciding which debt is to be paid first.  
• You cannot handle debt payments without creating a budget. Calculate total expenses and check if you earn enough to cover them. Whether or not you cover all expenses from your income, you should aim at trimming down your expenses to have more wiggle room to make higher payments towards your debts to get rid of them faster.  
• You will have to review your spending habits. Discretionary expenses must be stopped unless the settlement of all debt, but you will have to cut back on essential expenses as well. For instance, save money on groceries by preferring generic goods rather than branded ones. Adjust your budget accordingly.  
• Be committed to your debt payments. Whatever the plan you choose, make sure this helps you get rid of the debt faster.  

Debt repayment strategies  

Here are the three debt repayment strategies to help you get rid of debt faster: 

A debt snowball method 

A debt snowball method enables you to start paying off the smallest debt first while making minimum payments on other debts. Under this method, you will create a list of debt in an order from the smallest to the largest. Once you pay off the first debt in the list, you will move to the second debt while making minimum payments on the remaining debts. This cycle will continue unless you are left with the last debt in your list. It is vital to bear in mind that interest will keep accruing on the unpaid balance despite minimum payments.  

Here is an example to explain how it works: 

• £5,000 credit card debt at 18.95% APR 
• £3,000 payday loans at 49.9% APR 
• £9,00 personal loans at 9.99% APR 

Since the smallest loan is the payday loans in the above example, you will start paying off this debt first while making the minimum payment on the credit card debt and personal loans.  

It is important to note that if you have large secured loans such as mortgages and car loans, they are not included in a debt snowball or avalanche or consolidation method because they are paid down in fixed instalments over an extended duration. You should only aim at catching up the arrears to avoid incurring late payment charges. Even if you are on a tight budget, you should try to pay monthly instalments on time, as otherwise there is a risk of losing your house or car.  

You should choose a debt snowball method when you need little motivation. Small loans take less time to get settled, and hence you will have less stress about your financial situation. However, it might not allow you to tackle high-interest debts first. 

A debt avalanche method 

A debt avalanche method enables you to start paying off debts with high interest rates first while making minimum payments on others. The order of the debt avalanche method will be from the highest interest rate to the lowest interest rate.  

Here is an example: 

• £5,000 on credit card 1 with a 19.9% interest rate 
• £7,000 on credit card 2 with a 24.9% interest rate 
• £4,000 in payday loans with a 49.9% interest rate 

Since payday loans cost you the highest interest rate, you will tackle this debt first while making minimum payments on credit card 1 and 2.  

A debt avalanche method is useful for those who want to avoid paying more interest overall, contrary to a snowball method. You will need discipline and patience to manage a debt avalanche method successfully. Sometimes, it might be hard to be committed to payments in the face of unexpected expenses. 

A consolidation method 

When you have multiple short-term high-cost debts to be paid off in a lump sum, you can even try consolidating all of them into a personal loan to spread the cost. Consolidation loans work better for those who have high-interest debts and tend to miss a payment.  

A debt consolidation loan for bad credit is also possible to qualify, but not all lenders accept subprime borrowers. Those who sign off on your application will charge high interest rates. Bear in mind that consolidation loans do not include credit card debt.  

If you have multiple credit card bills, you will need to apply for a balance transfer card. These cards will allow you to pay off the balance within an introductory period without paying interest at all.  

The biggest disadvantage of consolidation loans is that you will still tend to rack up debt, and not all debts are guaranteed to be consolidated.  

Which strategy is better? 

None of them is better. It purely depends on your financial circumstances which one suits you best. If you need psychological relief, a debt snowball is a better option. However, if you do not want to end up paying too much interest overall, consider a debt avalanche method. If you have several high-interest loans, consolidation loans will be a great choice. Whichever strategy you use, mortgages and other secured loans will be handled separately.  

If you are unable to make the right choice for you, consult a debt expert. They will carefully analyse your financial condition to give some advice. Debt management plans are also available, but they will damage your credit score. If nothing works, filing bankruptcy can come in handy, but this will severely damage your credit rating too.