If there’s one thing you shouldn’t procrastinate on, it’s staying on top of your debt and making your debt payments on time. The sad thing is that not many people, although aware of the benefits, can do this.
People access loans for different reasons, which determine the type of loan they get. Yet many people are unable to pay off their loans for several reasons. It could be other financial obligations, family types, or everyday challenges.
Yet, the number of people accessing loans continues to rise. Debt.org reports that the figures are at an all-time high, as American household debts have reached $14.6 trillion in 2021. Top of the list is student, health, and mortgage-related loans.
Although the numbers are alarming, it’s possible to pay off your loans with the right plan. Later in this article, we’ll show you a proven strategy that can help you crush this goal.
However, many people tend to get it mixed up when it comes to accessing loans for personal use. They confuse personal loans for personal lines of credit and vice versa. This shouldn’t be the case as there’s a big difference between the two. Before moving on, let’s clear that up.
What are Personal Loans?
A personal loan is an arrangement in which a lender gives you a sum of money, usually without requesting collateral. The money lent to you comes with stipulated conditions and an agreed-upon loan term, which is when you have to ultimately pay off the debt and any outstanding interest.
In this arrangement, you’re expected to pay an agreed sum of money back to your lender every month until the end of the loan term.
There are many online companies that offer great rates on personal loans because they keep lenders competitive. Just like these personal loans in Florida, it’s wise to shop around to find the best deals.
What are Personal Lines of Credit?
A personal line of credit, just like a personal loan, allows you to access funds from a lender when needed. There’s also an agreement for you to pay back at the stipulated time.
With a personal line of credit, you can access as much cash as you need. Repayment is usually flexible, with no specific amount you must pay every month. However, interest rates differ according to the terms of the agreement.
Few Differences Between Personal Loans and Personal Lines of Credit
Here are some of the significant differences between personal loans and personal lines of credit:
1. With a personal loan, you’re expected to repay a specific sum of money each month until the debt is completely cleared. This specific sum will depend on a few factors, including the lender, your financial obligations, and the borrowed amount.
With personal lines of credit, you are allowed a more flexible payment plan. However, the downside of this flexibility is the fluctuating interest rate. The longer it takes you to pay off your debt, the more you’ll have to pay.
2. Personal loans are your best bet when you’re looking for money to make a one-off purchase. This lump sum can help you achieve a quick goal like purchasing a new car or making up the money to buy a new home. The predictable monthly payments associated with this loan type can help you structure your repayment plan properly.
On the other hand, personal lines of credit are more ideal if you intend to manage a purchase. This becomes truer if you aren’t sure of the exact cost of what you want to get. Think of a personal line of credit when you’re about to take on projects like home renovations. This loan type is also suitable for future emergencies.
How to Pay Off Your Personal Loans
It’s one thing to access personal loans; it’s another to make repayments.
One of the significant challenges that debtors face is deciding which loan to pay off first. As the indecision mounts, you find yourself procrastinating on paying off your debts at the right time, thereby incurring extra fees as a result of interest rates.
Also, there’s a possibility of paying off the wrong debts first or forgetting completely to even repay the loan. Doing any of these will translate to a negative effect on your personal credit score and can prevent lenders from trusting you with their resources in the future.
While there isn’t any rulebook that clearly states which of your loans to pay off first, you can find your way around it. Even if you have many maxed-out credit accounts/cards, there is a strategy to get out of debt. Here’s a step-by-step guide.
1. Stressing out much? That’s bad news already!
It’s only normal to start feeling overwhelmed when the bills roll in at the end of every month. This feeling intensifies when you have a lot of debts to pay off. The challenge is that once you’re stressed out, you’re likely to make a spur-of-the-moment decision and hurl your money in the direction of one lender.
Although this may seem like a good strategy, what if you end up paying off the wrong debts first?
So, take a deep breath. You need a clear head to actually sort through and make the best decision for your personal finances in the long run.
2. Prioritize your debts
You probably have a plethora of bills to pay – from school loans to mortgages, car loans, and everything in-between. However, not all these debts have the same immediate effect on your finances. There are some you should pay off first and others you may want to save for later.
Here’s the thing: for debts like school loans, you can allow some time to pass without getting into much financial trouble. This is because the government offers low-interest rates and more tax breaks on these loans, allowing you to pay way less than you would have on a high-interest debt like credit card debt.
So, you may want to pay the minimum on those school loans for a little longer, especially if you have more pressing needs.
3. Employ the Debt Snowball Method
The Debt Snowball method is a school of thought that teaches that the best way to pay off your debts is by focusing on the smaller debts first and clearing them off your table one by one.
Think of this as rolling down a hill. Paying off the smaller debts first helps you gain the momentum needed to focus on and clear off the huge debts around your neck.
Also, check out the interest rates of the loans you’re about to pay. Focus on paying off those with the highest interest rates first. Doing this can help improve your credit score and lessen your financial burden.
Deciding what debts to pay off first can be a daunting task. However, you have to make such decisions if you want to be debt-free. Paying off small debts first is an excellent way to go.