Debt Repayment Strategies

The first step towards getting a new home is getting the deposit together. However, when you are starting to review you finances you may find that having multiple different debts becomes difficult to manage and could cause issues when applying for a mortgage.

If you take out a car loan, have credit cards or a mortgage, then managing your repayments can get complicated.

The first thing to do is list out all of the different lenders you owe money to:

  • How much money do you owe, the balance of the debt
  • What is the interest rate
  • How much is the repayment is for each debt
Eg:

Lender/DebtBalanceRepayments per monthInterest%
Q card$2562$12525%

Now we have an understanding of your debts and outgoings we can decide on an appropriate strategy to manage them. There are several debt reduction strategies below which can help you take back control of your finances and better manage your debt.

 

The Snowball Strategy

What to Consider

The idea for the snowball method is simple: let’s start by paying off the smallest debt first, and getting the loan closed down before moving on to the larger ones. As your debts are paid off one by one, your own confidence in your financial management skills will increase and you will be able to gather the momentum you need to climb your personal mountain.

To get started, list your debts in order from smallest to largest and don’t worry about the interest rate attached to those debts. Then organise to make the minimum repayment on all of debts.

But for the debt with the lowest balance pay as much extra as you can each month until it is completely repaid. Then take the funds used to pay the last debt off and put them towards the next debt on your list. As you do this with each debt they get paid off faster and faster. Hence the ‘snowball’ effect.

The Avalanche Strategy

What to consider

List your debts from the highest interest rate to the lowest interest rate. Pay the minimum payment on all debts except the one with the highest interest rate, towards which you should pay as much as you can afford each month. Once this debt is repaid, move on to the next amount on your list using the money from the previously paid debt as well.

The avalanche method is a logical way of paying down debt. You will save a lot in interest payments by paying down the highest interest rate first.

The downside of the avalanche method is that it takes a long time to pay down large debts. You have to be very focussed on paying your debts. While the snowball method provides quick gratification and the psychological boost of paying off small debts first, the avalanche approach doesn’t offer the same instant rewards. As a result, some people can become discouraged and lose their disciplined approach to debt repayment.

 

Debt consolidation

A simple debt consolidation might be the first step toward your first home. By consolidating your personal debt into a single loan you will cut down the amount of interest and fees you pay, while making the weekly repayments easier.

Nest Home Loans can help you with this first step making managing your finances easier, while also giving you a plan toward buying your first home.

Many lenders will only accept borrowers with good credit and a history of making repayments. You will need to talk to our mortgage brokers and make sure you’re fully aware of the interest rate, fees and charges that apply to a debt consolidation so you can be sure it will actually save you money.

Debt agreements

This is between you and your lenders to agree to on repaying a sum of money that you can afford in order to settle the debt. Often a third party will step in to receive your payments and manage your debts for you.

If you are under significant financial pressure and struggling to repay your debts, a debt agreement or manager can help you avoid insolvency or bankruptcy.

Nest Home Loans can talk about whether this option is right for you and then refer you to a service who specialise in this field.

Which debt reduction strategy is right for you?

No two debts are the same, no two persons situation is the same and the emotional approach you have towards debt can have a big impact on your choice of strategy.

The most important thing you can do is create a plan and stick to it or ask for help. Work out which strategy you want to try and decide on a realistic affordable way to start tackling your debt.

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