Debt can be a valuable tool to help you reach your goals or cover a cash shortfall – but only if you use it in moderation. If you borrow too much money quickly, debt can overwhelm you, leaving you frustrated, anxious, and helpless as you struggle to make payments. Interest charges begin piling up, your credit score starts to erode, and your lenders threaten to garnish your wages if you don’t pay up.
Luckily, there are ways to alleviate your debt issues, many of which don’t require the assistance of a financial expert. If you’re motivated and disciplined, the right DIY debt relief strategy can help you escape crippling loan payments and lead you down the road to financial recovery.
This article explores ten strategies you can employ to pay down your debt and better manage your payments. Depending on your circumstances, you may need to use only one method to realize a significant improvement in your finances. Or you may need to combine several to achieve your desired results.
1. Create a budget
Establishing a budget to track your income and expenses is vital to properly managing your debt, which is why we rank it as number one on our list.
Budgeting is the foundation of all successful financial planning, as it instills healthy spending habits and encourages saving money. But how does a budget assist you in obtaining debt relief? There are two ways.
First, tallying up your expenses will allow you to identify potential areas where you can reign in your spending. For example, you may discover a considerable chunk of your income is devoted to a fancy coffee each morning. You can free up more cash to pay down your debt by cutting back on these discretionary items. As you continue to tweak your budget, you may be surprised to see how much extra money you can save each month.
Second, budgeting can help you avoid taking on more debt. By matching your income with your expenses monthly, you can reduce the chances of encountering a shortfall. As a result, you won’t need to turn to payday loans or credit cards to help cover your utility bills, groceries, gas, and other everyday essentials.
Creating and managing a budget may seem daunting, but it’s relatively easy, especially with the widespread availability of budgeting apps.
However, a budget won’t be too helpful if you’re severely in debt and pay steep interest rates on what you owe. Also, suppose you earn a low income. In that case, you may already be operating on a tight budget, so there’s no more room to cut expenses.
2. Consolidate your debt
Debt consolidation is when you obtain a new loan and use the proceeds to settle your existing debt, leaving you with one loan to repay.
Most debt consolidation loans are personal loans, meaning you can use the funds for various purposes. They may be secured or unsecured, and you must repay the principal in fixed monthly installments.
Another way to consolidate your debt is to apply for a balance transfer credit card, which provides you more flexibility with payments.
Debt consolidation loans and balance transfer credit cards are beneficial because they typically offer lower interest rates than other debt products. As a result, you can save on interest costs and pay off your debt sooner.
You’ll need to satisfy lenders’ qualifications to obtain debt consolidation loans or balance transfer credit cards. Unfortunately, if you have a low credit score, unreliable income, or high debt-to-income ratio, you’ll face hurdles in getting approved. Alternatively, you may only qualify for a loan at a higher rate, meaning your new payments won’t be significantly smaller.
Also, the discounted rates that balance transfer cards offer typically last for only six to 18 months. After that, the regular, much-steeper rate kicks in.
3. Prioritize your high-interest debt
A loan with a high interest rate can cause your debt to grow exponentially, which means it can take a long time to pay off your balance. In the long run, high-interest loans can severely dent your bank account. You could even pay more interest charges than the original principal.
Here’s an example that shows the total interest paid on a high-interest personal loan that charges 29.99% compared with a car loan that charges 3%.
|High-interest personal loan||Car loan|
|Term||7 years||7 years|
|Total interest paid||$14,024||$1,088|
In this scenario, you’d pay $14,024 in interest charges on the personal loan over seven years versus only $1,088 for the car loan, even though the principal is the same for both. Therefore, focus on paying down your down high-interest debt first. You can significantly reduce your total cost and keep more money in your pocket.
If you choose this debt management strategy, compile a list of all your debts and sort it from highest to lowest by the interest rate. Then apply as much extra money as possible to the balance with the highest rate while still paying the minimum balance on your other debts. After you’ve paid off the most expensive balance, proceed to tackle the debt with the second-highest rate, and so on.
One downside of this strategy is you’ll need extra money to pay off the high-interest debts, which may be challenging if you have little disposable income.
In addition, it requires time and patience to carry out successfully. If you’re knee-deep in debt, you may not have that long, especially if you’re already missing payment deadlines and creditors threaten to seize your assets.
4. Pay more than the minimum payment
The minimum payment is the smallest sum of money you must contribute each payment period to keep your account in good standing with your lender. Typically, minimum payments are associated with credit cards and lines of credit.
Contributing only the minimum amount required each month allows interest charges to accrue rapidly. As a result, you’ll spend more money paying down interest than the principal. Here’s an example that illustrates what happens if you make it a habit to only meet the minimum payment requirement on a credit card balance of $1,000:
|Option A: Pay the minimum payment each month||Option B: Pay a fixed amount of $100 each month|
|Time to pay off||12 years and 11 months||1 year|
Opting to pay only the minimum will take you more than a decade to finally clear your balance! And you’d pay a hefty amount in interest charges, too. This differential only gets higher if the debt is higher or the interest rate is higher.
If you would like to calculate the interest and length of time it will take to pay off your credit card balance, there is a credit card payment calculator offered by the government of Canada. The credit card payment calculator compares 3 different payment options to pay off your credit card balance.
Increasing your monthly payment is a great way to speed up the pace at which you reduce your principal. However, it’s only ideal if you have enough room in your budget to accommodate larger payments. You must also be capable of meeting the minimum payment requirements on all your other debts. Increasing your monthly payment may not be possible if you operate on a tight budget and carry a heavy debt load.
5. Apply financial windfalls toward your balance
Occasionally, a significant, often unexpected, amount of money may come your way. These financial windfalls can come from various sources:
- Work bonus
- Tax refund
- Lottery prize
- Casino winnings
- Sale of an asset
- Proceeds from a lawsuit
Whenever you receive an unexpected influx of cash, make a conscious decision to use the funds to pay down your debts. You can eliminate a considerable portion of your debt obligations in this manner, alleviating the financial strain on your household.
Unfortunately, relying on periodic cash infusions to reduce your debt isn’t very practical or reliable. An extended time may pass before you’re lucky enough to get your hands on a large sum of money. For this reason, it’s best to use financial windfalls in conjunction with other DIY debt relief strategies.
6. Cash in your investments
If you’re in a particularly dire situation regarding your debt obligations, consider freeing up cash by selling off your investments. These can be stocks, bonds, GICs, ETFs, or hard assets like gold and silver.
From a financial planning perspective, cashing in your investments isn’t ideal since their role is to preserve and build your wealth over time. However, overwhelming debt can severely damage your credit score and strain your household’s budget here and now. So, it may be worthwhile to liquidate some assets and use the cash to deal with your debt issues before they worsen.
However, refrain from cashing in your Registered Retirement Savings Plan. Funds in this account are exempt from seizure by lenders if you file for bankruptcy. Plus, there are harsh tax consequences if you withdraw funds from an RRSP. Also be mindful that selling investments will trigger capital gains or capital losses with tax consequences as well.
7. Brainstorm ways to boost your income
Sometimes, the only way to get a hold of the money you need to pay down your debts is to develop a second income stream.
Typically, this entails finding a part-time job. Or you could take up a flexible side hustle, such as delivering meals through Uber or selling a skill online on a platform like Upwork. If you’re a fan of passive income, you can also consider renting out a spare room in your home.
However, not everyone can easily add a second income stream to their household. Suppose you’re already working full-time, have children to care for, and have various other obligations. In that case, your hectic schedule may preclude you from working more. And renting out your home isn’t possible if you have no spare bedroom, or your landlord doesn’t allow you to sublease your property.
8. Tap into your home equity
Do you have considerable home equity in your property? If so, you can use it as leverage to obtain financing at a low rate, thereby allowing you to pay off your high-interest debt.
Two ways you can access your home equity are a home equity line of credit (HELOC) and a second mortgage.
In Canada, you can only borrow up to 65% of your home’s appraised value through a HELOC. If you opt for a second mortgage, you can borrow up to 80% of your home’s appraised value, less your first mortgage’s balance.
Since your home functions as collateral, HELOCs and second mortgage rates are lower than those found on credit cards, payday loans, and other forms of high-interest debt. As a result, you can realize significant cost savings by consolidating your debts under home equity financing.
Unfortunately, these types of loans also come with challenges and pose unique risks:
- If you default on your HELOC or mortgage payments, your lender can legally confiscate your home or force you to sell it
- Most lenders require that you have a minimum of 20% equity in your home to qualify for a HELOC or second mortgage
- HELOCs come with variable rates, which means they can increase over time, resulting in higher monthly payments
- You’ll likely need a “good” credit score (650 or higher) to qualify for financing at a favourable rate
9. Negotiate with your creditors
Negotiating the terms and conditions of your loans is possible. The process entails contacting each of your creditors and presenting an alternative repayment plan.
Lending institutions would rather see you repay at least a portion of your debt than default completely, resulting in them losing out on future interest revenue. For this reason, they may be open to a negotiated settlement so long as it’s fair and reasonable. If they agree to your proposal, you’ll benefit from a repayment plan that fits your budget, allowing you to meet your payment deadlines without a hitch.
However, remember that your creditors are not obligated to accept your revised payment terms. And any agreement you make with them isn’t legally binding, which means they can still initiate lawsuits against you to recover their money.
10. Borrow money from family and friends
Are you looking to consolidate your debt but unable to secure financing at a favourable rate and terms from traditional lenders? In that case, consider seeking help from a family member or friend.
Borrowing money from someone you know well, and trust can provide you with the financial aid you need to eliminate or reduce your debt. A family member or a friend may charge you an exceedingly low-interest rate or no interest. They may also offer supremely flexible payment terms, allowing you ample freedom in tackling your debt.
However, suppose you don’t uphold your end of the bargain by repaying what you owe. In that case, your relationship with your family member/friend can suffer irreparable damage. Not surprisingly, they’ll feel betrayed that you failed to honour your agreement. It could be a long time before you regain their trust, if ever. For this reason, only ask a family member or friend to loan you money in dire circumstances – the risk of endangering lifelong relationships isn’t worth it.
When DIY debt solutions work – and when you should seek outside help instead
There’s a vast array of DIY debt relief strategies you can adopt to improve your finances. Each has its benefits and drawbacks, so you’ll need to assess your circumstances to determine which would best help deal with your debt.
Successfully conquering your debt problems can give you tremendous empowerment and satisfaction. In the process, you’ll also learn valuable lessons on properly managing your money and curbing excessive spending so that you don’t fall into the debt trap again.
However, all the DIY strategies we’ve covered (plus many others) have one flaw: they won’t work if you’ve already accumulated way too much debt. All the extra money you assemble through strict budgeting, a second job, and other sources may not be enough to tackle your debts in any meaningful way. In such cases, seeking outside help is the most effective solution to getting your finances back on track.
One way to eliminate a large portion of your debt is to file a consumer proposal under the guidance of a Licensed Insolvency Trustee. A consumer proposal is a government-sponsored debt relief program that enables you to negotiate a revised payment plan with your creditors.
Depending on your situation, you can discharge up to 70% – 80% of your unsecured debts. These include credit cards, payday loans, lines of credit, tax debt, and even certain student loans. And unlike a personal debt settlement, the new payment terms are legally binding between you and your creditors. In addition, you’ll never have to pay interest or penalties on your remaining balance. Think of a consumer proposal as the ultimate debt consolidation loan!
At David Sklar & Associates, we’ve helped thousands of people find debt relief and gain financial freedom through consumer proposals. Contact us today for a free no-obligation consultation to learn whether a consumer proposal is the right debt relief option for you.Contact David Sklar
Photo by Mikhail Nilov