Although you are obligated to repay your debts, you don’t have to let them drag you — or your financial future — down.
However, before you can even take your first steps toward financial freedom, you’ll need a roadmap to get there. A “get out of debt plan,” if you will.
The good news is getting rid of debt is actually a pretty straightforward game of math and compound interest. And once you set a course of action, you’ll be empowered to move forward and get out of debt faster.
If you’re ready to make the change and become debt-free, here’s how to get started.
1. Mentally prepare for your get out of debt plan
Before you even create a get out of debt plan, you have to first adjust your mindset. And that involves taking the emotion out of your finances.
Debt can be a major source of stress, shame, and feelings of failure. So when you’re facing debt, it can feel like an insurmountable obstacle. You might think you’ll never get free of debt. Or, it’s too far in the future to even worry about.
It’s ok and even normal to feel those things. But don’t let emotions hold you back from taking necessary steps to tackle your debts.
No matter how dire your finances feel, there is a way out. And, you’re capable of creating and following that path to financial freedom.
Remember, you are in control of your debts — not the other way around. So before you commence your get out of debt plan, fuel up with the determination to change.
Essentially, if you’re changing your money behaviors then you’re also changing how you view yourself and your finances. All of which is crucial for becoming debt-free.
2. Research what your debts look like
With your new get-out-of-debt mindset now in place, you’ll be able to stomach a full assessment of your debts.
If you’re fuzzy on some key details about your debts, you’re not the only one. Many borrowers have no idea who is servicing their loans, what their interest rates are, or even when their pay-off dates will be.
This can be especially true of student loan debt. For example, you may have several student loans taken out at different times and serviced by different lenders.
Getting your free annual credit report is a great place to start. This will list out all of the debts you currently carry. Including the balance, servicer, and account status (such as current, past due, or delinquent).
With this list of debts, you can start collecting the following key information for each of your debt or credit accounts:
- Your balance, or how much you owe
- Current status of your account
- Interest rate for a specific debt
- Monthly minimum payment amount
- Payoff date
- Contact and login credentials for your account
The good news is you can easily log into your online accounts with most creditors.
Or, call them to get any additional information not listed on your credit report. Then, record these details in a list, spreadsheet, or format that works best for you.
If it’s intimidating to do this all at once, start small by checking out just a couple of accounts a day until you’re done.
3. Check the minimum you owe each month
Now that you have your debts listed out, you can figure out what you are obligated to pay each month.
Essentially it’s the amount you must pay to your creditors to keep your accounts in good standing. And avoid ugly consequences like late fees or default.
The total amount is what you get when you add up the minimum payments for each debt. Hopefully, this is an amount that you can afford each month.
If you’re having trouble keeping up with minimum payments, however, that’s an issue you must address ASAP. And if you’re already to the point of default on some of your debts and can’t afford to catch up, it might be time to contact a bankruptcy lawyer and consider your options.
For student debts, however, keep in mind that these can’t be discharged in bankruptcy. But you can start the process to get student loans out of default.
4. Map out out your monthly expenses
By paying the minimum amounts each month, you’ll stay current on debts. But, you won’t get ahead.
If you want to pay off your debts faster and be debt-free before all of your pay-off dates, that will require paying more than just the minimums.
But to know if you can afford to pay extra on your debts, you’ll need to know what your monthly expenses are. A budget or spending plan will help you account for your money. And keep you accountable for spending it on things that really matter.
Review account statements from your bank and other service providers to see what you are paying for living expenses each month. Add up what you pay for rent or mortgage, bills, and debt payments. Make sure it includes other necessities like childcare, tuition, and groceries.
5. Find how much extra you can afford to pay
Once you have this amount, see how much of a buffer you have left each month (your net income minus your monthly expenses).
This is your disposable income, the cash that’s left over each paycheck or month after you cover all of your necessary expenses.
It’s tempting to just assume you can put all of your disposable income towards extra debt payments. But you want to make sure you’re balancing debt prepayments with other financial goals and expenses as well.
For instance, you might want to save some of your disposable income into an emergency fund. Or, create a “fun money” fund so you don’t end up feeling deprived each month.
On the other hand, the more money you can put towards your debts, the sooner you can be free of them.
When you weigh all of these considerations, you’ll get a better sense of the actual dollar amount of extra debt payments you can potentially make each month.
6. Prioritize your debts
Now that you know how much extra you can afford to pay each month, you can decide the best way to apply extra payments towards your debts.
Remember, you’ll always save the most money on interest by putting extra payments towards high-interest debts first.
Unsecured debts like credit cards, personal loans, and lines of credit will typically have higher interest rates, while secured debt like home loans or car loans tend to have lower rates.
Although student loans are unsecured, they usually (but not always) will have lower interest rates.
Put your debts in order from the highest interest rate to the lowest. Then commit to putting all of the money you’ve earmarked for extra debt payments to lowering the debt at the top of the list with the highest rate.
Rinse and repeat.
7. Get your new payoff date
When you pay extra toward debts, you’ll ultimately pay off one account and free up that total amount you were spending on the monthly payment.
For instance, if you have a $200 payment and are paying $300 extra, once that debt is gone you can add $500 in extra payments to your next debt.
Applying these extra funds toward repaying debts is commonly called a debt snowball or debt avalanche because you keep rolling the freed-up funds into the next debt until they’re all paid off.
You can use the calculator below to get an idea of how much faster you can get rid of your debt if you are paying extra each month.
Or, if you have a goal to be debt-free in a certain number of years, you can also see how much extra you’d have to pay each month to achieve that.
Another tool, Unbury.me, can help you see similar information for all of your debts at once for an overview of all of your debts at once.
Using these tools, you can figure out your new pay-off date and when you’ll be completely debt-free. Then, mark it on your calendar and refer to it as you continue on your journey towards financial freedom.
Keep trying new debt pay-off strategies
With these seven steps, you have a get out of debt plan — a roadmap you can follow to get free of debt and save hundreds (and likely thousands) of dollars in interest.
But don’t stop here! Your getting out of debt plan is just the beginning. In addition to paying extra each month, there are other strategies you can employ to get rid of debt faster.
For instance, you might look into getting a side hustle going which can help you generate more money towards paying off debts.
Or, perhaps you’re interested in refinancing or consolidating debts to a lower interest rate so more of your money goes toward paying down your principal.
Consider improving your spending habits and living more frugally. Both can free up more cash flow for debt repayments.
Also, surround yourself with family, friends, and social circles who have successfully managed their debts. And don’t be afraid to ask them about how they did it or cheer each other on.
All of these actions can help empower you to make some big financial changes. At the end of the day, keep learning about finances, debt, and managing money. Find your grit, and use it to buckle down to make positive financial changes.
Remember, you’re in charge of your finances, for better or worse. You have the power to create financial security and get out of your debt cycle permanently.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 5.64%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.28%3||Undergrad & Graduate|
|1.89% – 6.77%4||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 5.41%5||Undergrad & Graduate|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.