Feeling overwhelmed by money owed for loans and bills? Discover four straightforward ways to simplify your debts so you can reach financial freedom faster.
Create an inventory
First things first: you need to establish exactly how much debt you have and from where.
Create an inventory of all outstanding debts such as loans, store card charges and credit card bills. Outline the original amount borrowed plus the interest rate, and how much you currently owe. If you’ve set up a repayment plan, include these details too to create a timeline for settling the debt. You should also include details of the lender and the type of loan you were given.
Having a comprehensive and honest overview of the money you owe will help to make the situation less overwhelming and enable you to put together an effective plan of action.
Separate ‘bad’ debt
It can be hard to manage debt alongside other financial commitments such as essential spending and savings. Working out when to prioritise debt over savings is one of the most complicated aspects of personal finance and can drive you to bury your head in the sand.
Simplify things by separating ‘bad’ and ‘good’ debt. Short-term borrowing options often have high interest rates that can make repayments unsustainable if ignored for too long. This includes credit cards and overdrafts. These debts should be settled as soon as possible.
In contrast, loans with a fixed-rate repayment plan from a trusted authority like a bank – such as mortgages – don’t need to be paid off straight away. As long as you’re keeping up with the payments, it’s fine to continue with the monthly minimum and put any remaining money into an emergency savings fund.
Negotiate with creditors
If you’re struggling to cover the cost of your debts – especially if this is leading you to pursue more short-term borrowing – you must negotiate with creditors for lower monthly repayments.
Household bills and legal fines cannot be changed and must be settled as requested, but you can request lower payments or a pause for non-priority debts where timely action is less urgent. Paying less might make it harder for you to get credit in the future, but it could help you clear your debt for good.
Independent organisation Citizens Advice recommends writing letters to your creditors to give more weight to your requests. Ask payments or interest to be frozen while you work out what to do, and if possible include a proposed repayment plan that you’re sure you can afford. It will help to explain your reasons for the debt and to give supporting evidence of your current financial situation such as your latest bank statements and payslips.
Consider consolidation
Once you’ve got your monthly charges down to the most management amounts, consider the option of debt consolidation loans to combine your separate repayments into one. This makes it much easier to keep track of your outstanding charges, giving you peace of mind that each debt is being settled to the correct amount each month.
You will likely have to pay interest on this loan, but if affordable it can be a useful solution to simplifying your debts.
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