A Plan For Clearing Your Debts

By Author: Donald Saunders
Total Articles: 84
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One major problem for many people today is that it is easy to recognize that you have a debt problem but very to recognize just how large that problem is. You may be surprised to discover that a very significant proportion of those people with a debt problem have no idea how much they owe or how much in total they are paying out in interest on their borrowings every month. As a result, your first step in dealing with your debt is to calculate just how large your problem is.

Write out a list of all the debts you presently have, noting down how much of your original debt is still outstanding and how much you are paying every month. You also need to separate out every payment to see how much of the payment represents a repayment of the original loan and how much is merely interest.

You may well be taken aback by what you find, not just in terms of how much you owe, but in terms of how much of your income is simply going to repay interest. For example, if you are earning $4,000 a month and are having to pay $400 each month simply in interest then this means that you are paying out 10 percent of your income without ...
... reducing the overall amount that you owe. Now this might or might not sound too bad, but take it one stage further. If $400 is the maximum that you can afford to pay out every then you can continue paying this for years without your debt going down at all.

With a bit of luck the difference between the amount you are having to pay in interest and the sum going to repay your original loans will be reasonable and it is difficult to quantify just what this should be as it will change from one loan to another. In a typical home loan for instance it is not unreasonable to pay 90% interest and 10% principle in the starting years of a mortgage, however you most assuredly do not want to be paying this with your credit card debt.

Once you have calculated the extent of the problem the next thing you ought to do is to construct a plan to pay off your debt as quickly as possible. For this you will need to work out how much in total you can afford to pay off every month and then decide how this money should be applied to your various different debts.

One possible answer is occasionally referred to as the 'snowball' method and involves paying off your smaller debts. You then have a greater sum of money to apply to your other debts and can slowly work your way up towards your largest debt.

Another answer to the problem is to take on your largest debt initially and so save the greatest amount of money in essentially wasted interest payments. This is not an easy method however and progress is slow making it difficult to stick to this particular plan.

Whichever plan you choose to follow you must not simply ignore some of your debts while you clear the others or you will fall foul of your lenders and adversely affect what might already be a damaged credit record. If coming up with at least the minimum required payment on all your debts then you will need to speak to the lenders concerned and see if they can assist. The majority of lenders will have a debt reduction settlement program and they may well agree to assist you by accepting lower payments for a short period, or possibly even to waive your payments for one or two months, if you clearly explain your situation to them.

If you find yourself in a mess and are trying to figure out how to deal with your debt then do not make matters worse than they already are by taking further debt. This might seem obvious but you would be surprised how many people try to borrow their way back into credit. This does not work and just makes a bad situation much worse.