Ask Yourself These 3 Questions to Choose the Best Debt Payoff Plan

by Christy Bieber | Updated Aug. 13, 2021 - First published on April 16, 2021

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The right payoff strategy can make all the difference in your ultimate success.

Paying off debt can be hard work, and it can take time. The good news is there are a number of approaches that can make the process easier. However, it can be hard to know which one is the smartest approach.

If you're struggling to decide how best to tackle your financial obligations in order to become debt free, answering these three questions could help.

1. Does consolidation make sense?

Debt consolidation can be the best approach to debt payoff if certain conditions are met. Consolidation involves getting one new loan, which is used to pay off several existing debts. If you qualify for a low-interest consolidation loan, reducing your interest costs can help save you money.

But there are some caveats. You have to actually be able to qualify for a debt-consolidation loan at a rate that is less than the rate on your current debt. And the monthly payments need to be affordable. If you're not committed to managing your money wisely, consolidation may be a bad idea. If you pay off a credit card and start using that freed-up line of credit for unnecessary purchases while paying off your loan, you're just making your situation worse.

If you can get a loan at a low rate with an affordable monthly payment and avoid further borrowing, consolidating ASAP can get you started on your payoff journey.

2. What are the different interest rates on your debt?

If you aren't going to consolidate, you'll have to pay off each debt individually. If your goal is to save as much money as possible, you'll want to first pay off your debt with the highest interest rate. To be clear, you'd make minimum payments on all your loans. But you'd put as much extra money as possible toward the most expensive debt you have.

Paying off your highest-interest debt first is called the "debt-avalanche" method. The premise of the debt avalanche is, once you've paid off your costliest debt, you redirect your funds to paying off the loan with the next highest rate and so on. By repaying your high-interest loans first, you save much more interest over time.

3. How motivated are you to repay debt?

Unfortunately, in some cases, your loans with high interest rates will also have high balances and will be difficult and time consuming to pay off. In that situation, it can be easy to lose your motivation to aggressively pay extra toward them because you may feel as though you never make any real progress.

If that's the case, the debt-snowball method may be a better alternative. That approach involves paying off loans with the lowest balance first, even if you have others charging a higher rate.

The premise behind the debt snowball is that you'll pay off those low-balance loans faster, score some quick wins, and thus be more likely to keep working hard on debt payoff for the long term. While this makes a lot of sense, given human psychology, it does mean acknowledging that your interest costs over time are going to be higher.

The best approach to paying off debt is the one that makes the most sense to you. The good news is there's no wrong debt-payoff strategy. And no matter which approach you choose, you'll end up a big winner if you succeed.

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