Table of Contents
- Determine How Much Debt You Have
- Look for Ways to Pay off Debt Quicker
- Come Up With a Repayment Strategy
- Ask for a Lower Interest Rate
- Exchange High-Interest Rates for Lower Ones
- Make a Balance Transfer
- Consider a Debt Consolidation Loan
- Don’t Just Reduce Interest Rates, Eliminate Your Debt!
In 2020, U.S consumer debt reached a new record at 14.88 trillion dollars! That comes out to be $92,727 of debt per consumer, with the bulk of this coming from mortgages, home equity loans, credit card debt, student loans, and auto loans.
The increase in average debt was likely due to the pandemic, which caused economic uncertainty among consumers. And, just as many people lost their jobs or faced unexpected changes in their lives, they needed to borrow money. And, some people took advantage of new lines of credit that offered to reduce interest rates.
Now that the pandemic is coming to a close, many consumers wonder how they can repay their debt and get rid of high-interest loans.
Do you find yourself in a similar situation? If so, stick around because, in this post, we will tell you everything you need to know about reducing your interest rates and paying off your debt faster!
Determine How Much Debt You Have
Before you can develop a plan to reduce interest rates, you’ll need to get your facts straight. So, gather your statements, write down how much you owe on each account, and calculate the total. Moreover, it would help to note the annual percentage interest rate (APR) you are paying.
Having this information will help you make well-educated decisions from this point on.
Look for Ways to Pay off Debt Quicker
If you don’t have too much debt, increasing your monthly payment is one of the simplest ways to pay less interest.
So, if you are currently paying only the minimum, why not try to pay extra each month? Alternatively, you can make a few additional payments during each billing cycle as you see fit. Doing so will help you pay off your credit cards much quicker!
Moreover, if you have a loan, some lenders let you make an additional payment every month that goes toward the principal. However, you will have to check your particular loan terms to ensure there are no fees or penalties.
Come Up With a Repayment Strategy
Knowing how you will pay off your debt will give you a sense of what steps to take next. Let’s take a look at four great strategies for paying off debt quickly.
In this strategy, you prioritize your smallest debts first, paying them off as quickly as possible. Of course, in the meantime, you should also continue to pay off the minimums on other debts. Once your smallest debts are paid off, you can move on to larger ones.
The avalanche strategy focuses on getting rid of debt with the highest interest rate first. Many people prefer this strategy because you will pay a lot less interest in the long run.
Consolidation consists of taking multiple debts and combining them into a single loan. Paying your debt will be much more manageable if your new loan has a lower interest rate.
Later in this post, we will consider some options for consolidating your debt.
Debt Management Plan
Another option for dealing with a huge amount of debt is credit counseling. A nonprofit agency can create a plan for you to repay your debt and reduce your interest rate.
With these strategies in mind, let’s take a look at some methods for reducing your interest rate.
Ask for a Lower Interest Rate
While moving your debt to another account could save you money, you may not have to do this to get a better rate. Sometimes all you need to do is call your current lender and ask them for a lower interest rate. However, they may have to convert your account into a different type, as long as you qualify.
Of course, you should do some research first and confirm that you don’t already have their best rate. If the lender doesn’t offer any lower interest rates, you may want to consider moving your debt to an account with a different lender.
Exchange High-Interest Rates for Lower Ones
Another good idea to consider is the opportunities you have to eliminate high-interest accounts altogether. For example, if you have a home equity line of credit or a personal one with low interest, you can shift your high-interest debts to these accounts.
Make a Balance Transfer
If you can’t get a lower rate on a high-interest account, your best bet may be making a balance transfer. That involves moving your card’s balance to another account, ideally one with a low interest rate.
If your credit score is already good (over 670), you likely already have offers for balance transfers waiting for you. Some of which even offer no interest on the debt you move to the account for a specific period of time.
There are some important things to keep in mind before performing a balance transfer. For example, the promotional APR that applies to your transfer amount may not be the same as the rate you pay on new purchases. Usually, this rate is much higher.
If this is the case with your account, try to avoid making purchases with this account. Rather, use it as a tool to pay off your debt and save money on interest.
More often than not, lenders charge you to transfer your balance from one card to another. It may be a certain percentage (usually 1-3% of the balance) or a flat fee. One way around this is to call your lender and ask for the cost to be waived, which they sometimes do.
Another thing to keep in mind is that the balance transfer rate won’t last forever. Usually, the promotional offer expires after a few months or a year. So, try to pay off the balance in full before this happens to avoid paying unnecessary interest fees.
By considering all these factors, you can beat the credit card lenders at their own game and end up saving a lot of money on interest fees while paying off your debt.
Consider a Debt Consolidation Loan
If your mountain of debt scattered across several accounts seems impossible for you to manage, a debt consolidation loan may be the best choice. As we mentioned, this is one of the strategies for reducing and paying off your debt because it transfers all your debt to one loan.
Of course, this isn’t always the right choice. So, it’s important to consider your financial situation carefully before consolidating your debt. However, here are some instances when it’s a good option.
Your Credit Score Is Good
Nearly anyone can get a personal loan, but the terms and interest rate will be much better if you have good credit. And, of course, you wouldn’t want to transfer your debt to a high-interest loan.
Your Current Accounts Are High Interest
Combining your debt can save you both time and money if you pay more than 10% on your loans or more than 16% on credit cards. In addition, doing so would allow you to save a lot on interest fees, especially if you can get a lower than average rate.
You’ve Already Created a Plan to Repay Your Debt
Unlike credit cards that allow you to spend and repay as you wish, personal loans have a repayment term. So, you will need to make sure that you can make your payment every month.
If you are only making your minimum and continue spending on your card every month, a personal loan probably won’t work for you unless you plan to change your habits.
If, based on these factors, you determine that getting a debt consolidation loan is in your best interests, start searching for the best offers out there. For example, you can consider a debt consolidation loan from Plenti, use a bank, or apply at a credit union. Keep in mind, though, that online lenders typically offer the best rates.
Yet, if you decide that debt consolidation isn’t right for you due to your spending habits, reevaluate your credit card use and make a budget. You may see that paying off your debt isn’t as difficult as you had imagined.
And, if you need help, consider credit counseling. It’s is a great way to control your spending, especially if you lack the self-discipline to eliminate your debt alone.
Don’t Just Reduce Interest Rates, Eliminate Your Debt!
After reading this post, you’re better prepared to reduce interest rates on your current accounts or consolidate your debt to save money. But, of course, once you take these steps, you should continue to make smart decisions.
Remember to pay off your balances on time and avoid accumulating more debt. By doing so, you can be set free from your debt over time and pave the way for financial independence. So, get to work because there’s no better feeling than complete debt relief!
If you enjoyed this post, be sure to check out more of our finance articles!