Most people in debt share a common goal: to pay it off quickly and save as much money as possible. No one wants to spend more than they have to. Fortunately, there are many different ways to get out of debt faster and for less money. Consider six of the cheapest ways to get out of debt and find the solution that is right for you.
Why is Debt So Expensive?
The answer is compound interest. Consider this example: If you want to take out a loan for the price of two, simply borrow at a 12% interest rate, and pay it off as scheduled.
It’s a terrifying thought, but it’s incredibly common. Compound interest causes debt to double and sometimes even triple or quadruple due to a mathematical reality called the rule of 72.
What is the Rule of 72?
The Rule of 72 is a mathematical shortcut created by Albert Einstein. It calculates how long it takes for an amount to double when compound interest is applied. It’s not exact, but it’s not more than half a year off.
How it works: Divide 72 by your interest rate and determine how long it would take for the loan or investment amount to double.
- 1% takes 72 years to double
- 5% takes about 15 years to double
- 10% takes 7.2 years to double
- 20% takes 3.6 years to double
- 36% doubles in just two years
To keep your debt from doubling or worse, the solution is to pay more, more often. The formula also demonstrates the importance of getting a lower interest rate and why paying debt slowly is so expensive. By following some combination of techniques in this list, you can save money on your debt.
6 Of The Cheapest Ways to Get Out of Debt
- Pay On Your Debt More Often
- Pay More Than the Minimum Payment
- Put Windfalls Toward Your Debt
- Pay Down Your Most Expensive Debt First
- Consolidate Your Debt for a Lower Interest Rate
- Resolve Your Debt For Less Than You Owe
By dividing your monthly obligation bi-weekly, or weekly payments, you can effectively cut your interest rate and get out of debt faster.
1. Pay On Your Debt More Often
You can reduce your overall interest charges for credit card accounts that carry a balance month to month by making multiple small, frequent payments. It helps because, in many cases, interest accrues based on your average daily balance during the billing period. The lower you can keep the balance day by day, the less interest you pay.
For loans, this only works if your loan doesn’t have a static monthly payment term. It won’t be helpful if your loan is amortized on a specific date regardless of when you paid. So make sure you check with your loan provider and enroll in a bi-weekly repayment plan if necessary.
2. Pay More Than the Minimum Payment
Interest can cause debt to grow over time, and most minimum payments are too low to keep up. For example, if your credit card has an interest rate of 23% and the minimum payment is 3%, that means that most of your monthly payment is paying off interest charges rather than lowering your principal balance.
By paying more than the minimum payment, you can lower your balance faster and pay much less over time.
3. Put Windfalls Toward Your Debt
A windfall is a sizable, sometimes unexpected financial gain. Unexpected windfalls might include inheritances, prize winnings, and gifts. You may also have an anticipated windfall from a tax return, large sale, investments returns, or job bonus.
When you have extra money on hand from a windfall, using the money to pay down debt can help save you money long term. You can use the money to lower your principal balance faster and ultimately save on interest payments over the life of the debt.
4. Pay Down Your Most Expensive Debts First
Your most expensive debts have the highest interest rates. One debt-repayment strategy, the Avalanche method, advises that you pay off the debt by interest rate, starting with the highest first and working your way down.
To get out of debt with this approach, you’ll need to regularly pay more than the minimum payment. You’ll also need to continue making minimum payments on your other debts.
5. Consolidate Your Debt at a Lower Interest Rate
If changing the amount and frequency of what you are paying on your debts isn’t making a big enough dent, it might be time to restructure your debt. You can do this by applying for a new loan with a lower interest than you currently pay.
You can use the strategy to consolidate multiple debts which have different interest rates. It also helps by simplifying repayment. Instead of paying multiple debts with varying interest rates every month, your debt consolidated into one with a new interest rate and one monthly payment.
When you pay a lower interest rate, the savings add up quickly. You’ll save even more if you pay more than the minimum amount on the new loan.
6. Resolve Your Debt For Less Than You Owe
Other debt repayment methods rely on your ability to pay more, more often. Or to qualify for a better interest rate so you can restructure your debt. If you are already struggling with debt, these options may not be best for you. Debt resolution is an alternative that allows you to renegotiate terms that make it possible to get out of debt faster and for less than is owed.
In a debt resolution program, you enroll multiple debts and delay payment to your creditors while a Consolidation Specialist negotiates a resolution with your creditors.
Debt resolution helps neutralize the impact of compound interest by changing the total amount owed on the debt and setting a fixed repayment schedule. While results vary, a resolution program can significantly reduce your debt.
Once the creditor agrees to the resolution, the debt effectively stops growing and will be discharged when the agreed-upon payments are complete.