Budget and Categorize Your Loans
When it comes to being debt-free, the first thing you need to do is draw up an effective budget that will help manage your cash flow. An important part of the budgeting process, particularly if you have taken out multiple loans and are still repaying them, is to categorize your debt. Categorising your debt is the process where you prioritise the repayment of your various loans by their interest rate.
Interest rates determine the amount of credit that you will have to repay over time, in addition to the amount of cash that you initially borrowed. It stands to reason that the higher the interest rate on your loan, the more money you will have to repay over time; and this can only increase if you fall behind on your repayments or fall into arrears.
To prevent rising costs, categorising your loans by their interest rate helps you prioritise the repayment of loans with a higher interest rate. Should you repay a loan with a higher interest rate first, you would essentially be spending less money over time – and this can help you to allocate more money towards repaying all your outstanding debt.
Remember to always avoid using credit to pay off credit; that is, avoiding making repayments on one loan to service the repayment of another. If you are unable to repay all your outstanding loans on the terms you initially agreed, you should rather opt to negotiate a longer payment term and instead break down large repayments into smaller and more manageable amounts. Though you might end up repaying your loans over a longer period, doing this can help you avoid becoming overly indebted and can ensure that you do not fall into arrears – which will not only affect your financial standing, but your credit score as well.
Although this sounds daunting, it doesn’t have to be – there are many online tools that can help you draw up a great budget to kickstart this process - and if you’re ready to get started, we have a great monthly planner to get you going.
Always remember that when it comes to repaying your loans, making timely repayments, putting any extra income into your repayments, and seeking help when you need it is the recipe to success.
Pay Off and Cut Up Your Store Cards
Many stores will encourage you to take out a store card, where you can purchase items on credit instead of paying cash. While this can be one way of managing your cash flow for something you might need, remember that store accounts can charge interest and management fees that will quickly add up should your accounts remain unpaid.
If you have outstanding debt on a store card, prioritise paying off that debt, and once you have successfully made all repayments, cancel the card as quickly as possible. Try to live by the simple principle – if items are a want (and not a need) and you can’t afford to pay cash, don’t pay at all!
Pay Yourself First
The concept of ‘Paying Yourself First’ doesn’t mean spending all your money as quickly as possible on feel-good items such as the latest clothing or trendy experiences; it means making forward-thinking payments to accounts that will either appreciate (that is, grow in value) over time, or will cost you less money going forward.
When it comes to managing your debt, paying yourself first means prioritising loan repayments before saving any additional income or purchasing assets that you might want, but not necessarily need. The logic behind this approach is rooted in the fact that should your loans go unpaid, your debt will rapidly increase as the interest rate attached to your initial loan amount will be far higher compared to the interest rate attached to any savings account you might have.
As a result, if you prioritise making repayments on a loan (paying yourself first) before saving, you will in fact be spending less money over time, and will have more money in the future to commit to your savings goals.
Re-evaluate your assets
Most of us feel trapped in the belief that we need to purchase our own home or car to ‘keep up with the Joneses.’ However, few people consider that both of these major purchases come with their own set of expenses that will steadily increase over time. Consider that when purchasing a car, handling repayments on any finance will only be part of your concern; you will also need to pay for fuel, wear and tear on your tyres, maintenance, and any parking fees.
Before committing to major purchases, consider if you really need to purchase that asset to begin with. If you can, consider either renting (in the case of property) or using public transport (in the case of owning a vehicle) – you’ll spend far less money by not purchasing the asset, and this can help not only to avoid further debt, but free up additional income to repay any other loans you may have.
Consider Consolidating Your Loans
If you find that you either have too many loans that are difficult to repay or find yourself in steep debt as a result of falling into arrears or being behind on too many repayments, you can opt to enter into a loan consolidation with a debt counselling specialist. This is the process where you can bundle multiple loans together into one simple monthly repayment at a new interest rate.
While this can sound appealing, it is worthwhile to remember that this does not decrease your overall level of debt – you will only be able to change your repayment arrangement, and ideally make it more manageable month-to-month.
You will still be required to manage monthly payments in this regard, and the fact that you have sought a loan consolidation will be noted on your credit report. This can influence another lender’s decision to provide credit to you in the future should you require it.
When seeking to consolidate your debt, it is important to remember to seek out a reputable debt counsellor who will take you through this process step-by-step.
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