You must intelligently employ a strategy to repay your debt. Pay at least 20% or more of your total income toward your existing debts. When paying off multiple debts, always pay more money to the debt with the highest interest rate first because the higher the interest rate, the greater amount of money you pay to that debt over time. Repaying debts with higher interest rates faster than those with lower interest rates saves you money and allows you to repay all of your debts in less time.
Example: You make $3,000 per month from your primary job and have a car loan and a credit card bill that must be paid off. You have $600 per month, or 20% of your income, that can go toward this goal. Your car loan has a balance of $4,000 at 6% interest per year with a monthly payment of $290. Your credit card has a balance of $7,500 at 21% interest per year and a minimum monthly payment of $206.
After paying the combined minimum payments of $496 for both the car and credit card, you have $104 remaining in your budget of $600. The extra $104 should be used to repay your credit card because it has thehighest interest rate. Paying the credit card’s minimum payment, plus an extra $104 every month, will save you over $10,000 in interest and completely pay off this debt in 32 months.
Once your credit card is paid off, apply the $310 (remember, this is the credit card’s $206 minimum payment plus the extra $104) you were paying on the credit card toward your car loan. Pay the $290 minimum monthly payment on the car loan plus the old credit card payment of $310 for a combined payment of $600.
Repeat this process until all your debts are paid.
Before you repay any debt, make sure you understand the terms under which you borrowed the money. Some debts can’t be repaid faster than what was first agreed to when you initially borrowed the money. If you have any doubts and questions about your debts, seek professional advice.