Borrowing money is easier but paying off debt is daunting. Almost 30% of borrowers fall into a debt trap and struggle to pay it off. The most common reason for being unable to get out outstanding debt is that you borrow more than your affordability.
Most of the time, you do not realize that you do not have just to pay back the money you are borrowing, but you also need to pay the interest on top of that. Credit cards are very easy to use when you are to make a purchase, but when the due date falls, you run out of money.
As a result, your credit card debt starts growing up. If you have taken out business startup loans for bad credit in the UK, it becomes more challenging to manage your debt. Before it is too late, you should determine the right strategy to settle your outstanding bills.
The payment strategy you should use for outstanding debt settlement
There are a couple of ways you can use to get out of debt obligations, but each of them has its own pros and cons. You should carefully consider which one can suit your budget. Take a look at them:
The debt snowball method is an appropriate method for those who need some encouragement to settle all dues. This settlement involves paying off from the smallest to the largest debt. For instance, you have three outstanding debts as follows:
- £5,000 credit card debt at 12.59%
- £500 cash loan at 4.5%
- £3,000 bad credit loan at 9%
Since this method involves the settlement of the smallest debt, first you will pay off a £500 cash loan, and then you will be paying off bad credit loans, and then credit card debt. You will generally be making smaller payments for larger debts so that you can avoid interest accruing on the whole outstanding amount.
Here are the pros and cons of debt settlement
- Since you will be paying off the debt fast, it builds motivation.
- It is easy to implement if you cannot start paying debt with a high-interest rate.
- It is expensive because interest will accrue on the unpaid balance.
- It can take a longer time to have debt-free life.
The debt avalanche method is absolutely different from the snowball method. It involves paying off the debt with high interest first and then with low interest. This sort of method is applicable for those who can still manage to pay down a significant amount of money.
If you use the same example mentioned above in the snowball method, you will be paying off credit card debt first, then bad credit loans and then cash loans.
Since you are paying the debt with a high-interest rate, it does not mean that you will be able to save a lot of money. You will have to do the basic calculation to know how much you will be paying in a specific period of time.
Here are the pros and cons:
- It minimizes the interest that you will be paying in total.
- It takes less time to settle your outstanding dues.
- It requires a constant amount of additional income to stick to the plan.
- It can be very difficult to settle debt with a high-interest rate first.
If it is being complicated for you to manage the payments of all debts, you should consider opting for a consolidation loan. You will take out one large personal loan to pay off all of your current outstanding debts like credit card debts, emergency money in the UK, bad credit loans, etc.
You will use the personal loan to pay off these loans once and for all, and then you will be left with it only to pay down in fixed monthly installments. This method is suitable for those borrowers who can stay committed not to borrow money unless the full and final settlement of this debt.
Here are the pros and cons:
- You can clear all of your outstanding debts at once without worrying about missing the repayment dates.
- Since you will be paying down the personal loan in installments, it will be much more manageable.
- Debt consolidation loans can come with high-interest rates.
- You will likely collapse if you do not pay it off on time.
The bottom line
There are several methods when it comes to debt settlement. Each of them has its own pros and cons, and therefore, it becomes crucial to weigh them up carefully.
It is suggested that you use the method you can stick to unless you pay off the entire debt. Otherwise, you will do more harm than good.
If you are not getting which method suits your budget, you should consult a financial expert who can help you decide.
They will likely examine your repaying capacity by analyzing your current financial situation. Apart from this, you will have to control your expenses.
Create a budget so, you do not overspend money, and you should try to set by the money to be paid toward the debt. Unless you settle your debt, it must be your primary obligation, and for that, if you are to cut down on your expenses, you should.
Say no to discretionary expenses and live off a lean budget, so your money goes toward only essential expenses. Regardless of the debt settlement method you choose, you will have to live off a budget to avoid worsening your financial situation further.