No one wants to have debt weighing on their shoulders, but unfortunately millions of Americans do.
Monthly payments toward loans are the norm nowadays. College grads with student loans owe on average $32,731, with an average loan payment of $393 a month, per EducationData.org. A recent survey by credit reporting agency Experian found the average credit cardholder owes $2,326 in credit card debt, with an average monthly bill of about $780. And don't forget home loans. According to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey, the average application size for a purchase mortgage in the week ending Oct. 2 hit a record-high of $371,500.
Getting out of debt is even harder amid the coronavirus pandemic. Although U.S. unemployment declined in September by 0.5% to 7.9%, that still leaves 12.6 million Americans out of work, the Bureau of Labor Statistics reports.
But let's look at the silver lining: There are several ways you can pay off your debt. Making a lump-sum payment is one approach, but it may not be feasible depending on your financial situation. Setting aside money to gradually chip away at your debts, making the minimum monthly payments, and paying bills on time are other valid options — but that will take a while. Here are some other strategies you should consider to pay down debt:
- Take out a personal loan
- Take out a debt consolidation loan
- Get a balance transfer card
- Use the debt snowball or debt avalanche methods
1. Take out a personal loan
Total personal loan balances in the U.S. reached a high of $162 billion in the first quarter of 2020, according to the credit bureau TransUnion. When you take out this loan, you borrow a set amount of money and repay the debt over a fixed time period at a fixed interest rate. These loans are popular now because interest rates are near record lows.
According to Credible, rates are as low as 4.99%. To take advantage of these low loan rates, head to Credible's website. Enter your desired loan amount, estimated credit score, and check rates from several lenders at once.
There are a couple of caveats. Consider this before you decide to take out a personal loan to pay down debt:
- Your loan's interest rate depends on your personal finances
- You'll have to stick to a budget
1. Your loan's interest rate depends on your personal finances: Your loan’s interest rate will depend on your credit score, debt-to-income ratio (how much debt you owe across all of your accounts, divided by your gross monthly income), and lender. Borrowers with higher scores and lower debt-to-income ratios tend to qualify for the best rates, and rate offers can vary by lender.
2. You'll have to stick to a budget: Because lenders impose few restrictions on how borrowers are allowed to spend personal loans, you’ll have to be able to exert some self-control and avoid spending the money on things you don’t need, like that flat-screen TV you’ve been eyeing.
Want to explore your personal loan options? Head over to Credible to compare rates and lenders within minutes.
2. Take out a debt consolidation loan
If you have multiple sources of debt, a consolidation loan will enable you to combine your debts into one loan so that you only need to make one payment a month. Consequently, rolling your debts together can make your bills more manageable. Also, taking out a debt consolidation loan can potentially save you a significant sum of money over time depending on what interest rate you qualify for. Many debt consolidation loans offer a 0% introductory interest rate.
Pro tip: Check your credit report before applying for a consolidation loan, to make sure there are no errors dragging down your credit score. Also, depending on what shape your credit is in, it may make sense to wait a few months before applying for a loan while you take steps to raise your score in order to qualify for the best interest rates.
Visit Credible to apply for a debt consolidation loan and compare rates from multiple lenders.
3. Get a balance transfer card
If you’ve racked up a lot of high-interest credit card debt, transferring the debt to a balance transfer card with a low interest rate may help you save hundreds of dollars in interest. Indeed, a number of balance transfer cards offer a low or even 0% introductory rate, usually for one to two years.
One thing to consider before applying for a balance transfer card: Some credit card companies charge high balance transfer fees and other charges, so visit Credible to compare card options and find the right balance transfer card for you.
4. Use the debt snowball or debt avalanche methods
Generally, there are two strategies you can choose from when paying off debt.
- Debt snowball method
- Debt avalanche method
1. Debt Snowball method: The debt snowball method entails paying off your debts in order from the smallest balance to the largest. The main benefit of this tactic is it helps you gain momentum (much like rolling a snowball downhill).
2. Debt avalanche method: The debt avalanche method targets debts with the highest interest rates first. This approach is the cheaper of the two, mathematically, since you’ll save more money in interest than you would with the snowball method, but it’s not for everyone. You may not get the same confidence boost with the avalanche method that you get with the snowball method. You also don’t get the gratification of seeing the balance of one of your accounts go down quickly at the start of your debt payoff journey.