How to Prioritize Debt Repayment

Debt can do more damage than lowering your credit score and putting you in a situation of financial inconvenience. If you aren’t careful enough, debt can affect you mentally and emotionally – it can even drive you crazy. In fact, 29% of people develop depression from accumulating debt, according to a study by Dr. John Gathergood.

While you might want to clear the debt so badly, the feeling of depression and being overwhelmed are all issues that can dim your motivation to fulfill your end of the bargain. Even worse, debt tends to drain your financial resources which are already scarce in the first place. Instead of approaching the situation blindly, the best option is to plan on how to pay all the loans you owe.

Here is how to prioritize your loan payment:

Understand the Loan Details

When looking to pay down your loans without limited financial stress, it is essential to understand your liability landscape, according to BingoLoans. You need to identify how much you owe every lender, the due dates of the loans and their interest rates. Luckily, this information is typically made available to you through the mail, or the online accounts that you have with the lenders.

In case you can’t access this information, it is essential to contact your lender soon. Additionally, having a budget on your daily spending will also suffice to ensure that paying down the loan will not mean sacrificing essential bills.

Prioritize the Loans In Terms Of Interest Rates

Interest rate can be a huge factor in debt repayments, and prioritizing to pay off the high-interest rate loans will save you money. This is because you will pay off the accruing interest rates on your loan as you head on to pay the principal amount. In fact, if you choose to make more payments for the loan with a higher interest rate, you are bound to save even more cash.

The trick is to list your loans in ascending order and focus most on the high-interest ones. Despite being a financially wise method, this option might not be good enough when looking to have psychological peace during loan payment.

Prioritize the Loan by the Amount

Staring at the huge amounts you owe without an idea on how to eliminate them completely can be frustrating. In such a situation, even a little progress can mean a lot in giving you some peace. As such, the first method above will not work as effectively as you might have wanted, especially if the account with the highest interest has the highest balance.

In this method, you should start by clearing the loans with the least amount. While you will not save any money, the small wins and the satisfaction you get from getting a loan out of your way are a step in the right direction. Furthermore, the baby steps of clearing small loans will give you enough motivation to commit to the bigger amounts.

Commit the Extra Earnings to the Loan

Having a budget for loan repayment is vital to ensure that you neither strain yourself nor neglect the loans. When forming the budget, you should ensure that the amount you allocate to your daily spending is enough to take you through the loan repayment period. However, you can still receive some unexpected cash during this period.

This can be cash from friends, a side business that you start, or even any savings that you have made by being frugal. In such instance, it is wise to channel this cash towards loan repayment. After all, you would have survived without this extra cash. You can choose to either include this extra cash to paying the high-interest loan or the lower amount depending on your choice of prioritization.

Conclusion

While your loans might seem like a major challenge, all it takes is enough visibility to conquer this psychological mountain. Taking the first step might seem hard, but it only gets easier as you pay down the loan. Consider the options above to reduce the emotional burden that lies in loan repayment.