5 Ways To Get Out of Debt If This Year Has Been Hell on Your Finances, According To Experts
2020 has certainly proven to be a challenging year. Along with rising housing prices and increased costs of living, the onset of the COVID-19 pandemic has created a multitude of financial challenges for millions of people. Layoffs, salary cuts, reduced hours, and COVID-related health issues (and medical bills) have left many people struggling to pay off existing debts in a timely fashion—and maybe even building even more debt in the process.
It can be difficult to feel like all of this isn’t your fault, even though you’re staring down a lot of forces that are beyond your control. That’s why it’s important to remember that you are not alone in your financial struggle, and that there are several simple financial moves you can make to ease the pains of debt repayments without going further in the hole.
Some credit card companies and loan providers are offering financial assistance to their borrowers in the form of deferred payments and lowered interest rates, but holding off on paying down your debt may not always be the smartest move to make financially. “While not having to pay your mortgage, student loan, or credit card bills without penalty for a few months might sound great at first, the fine print shows the lump sum of these missed payments is usually due at the time that the grace period ends,” Priya Malani, founder and CEO of Stash Wealth, tells Apartment Therapy. “Which might wind up putting you in a bigger financial bind than you were to begin with.”
Interested in learning more about how you can pay down your debt even when you’re low on funds? From refinancing loans to taking advantage of reduced rate offers and more, here’s what financial steps Malani and Grace Peng, a financial planner at Prudential, say you can take to ease that bottom line, and maybe even pay off your debt sooner than you thought.
Look into refinancing your loans
If you currently have a mortgage, car or student loan, Peng suggests taking out a new loan to pay off those debts. “In some cases, it could make sense to consolidate higher interest rate items to a lower interest rate loan,” she explains.
And while the initial costs associated with refinancing might seem daunting upfront (think credit report and tax service fees), Malani says the long-term benefits make it well worth it in the long run. “With student loans alone, many young professionals have the potential to save tens of thousands of dollars in debt-paydown over the lifetime of the loan. Money released a list of preferred student loan refinancing companies, complete with minimum credit score to qualify, fees, and interest rates all included.”
It’s important to note that there are several risks involved when refinancing loans. Not only could you wind up paying more money in the long run because a home or car loan is extended, you could also lose access to income-driven repayment plans or federal loan forgiveness programs when you refinance a federal student loan. Before refinancing a loan, determine the specific interest rate or term length required to save money, and whether or not it will impact your ability to apply for other repayment options. If you can afford it, this might be the time to seek the personalized advice of a financial advisor.
Take advantage of reduced rate offers
If you’re having trouble coming up with enough money to make monthly debt repayments, Peng recommends contacting each of your service providers to discuss lower rates, or shopping for new ones to see if you can find better rates elsewhere. “Businesses often offer savings and discounts for client retention, or to attract new clients, so you might be able to get cable and internet, insurance policies, or mobile plans at a lower rate,” she says. “Reducing debt can be done by applying more funds, but it also could mean finding lower interest rates to lower the cost over time and slow down the growth of your debt.”
Consider moving your debt to a zero-interest credit card
“Only do this if you can ensure you’ll be able to pay the credit card balance off before the zero-interest trial rate period ends,” she advises. “Along with increasing your credit utilization ratio (the ratio of credit card balances to credit limits), this will give you a chance to pay down your debt without an astronomical interest rate attached.”
Declutter your space (or monetize your skills) to supplement or replace your income
You can also consider alternative ways to generate extra cash to pay off your debts, such as taking on a side job or selling furniture, clothing, and home decor items you no longer use online. “Thanks to the internet, the ability to turn your hobby into profit is easier than ever,” Malani says. “Sell your gently used clothing and furniture on Facebook Marketplace or Poshmark, sell your talents on TaskRabbit, or Handy, or register with a freelance service site such as Fiverr to connect with businesses and employers searching for your unique set of skills.”
These forms of supplemental income aren’t always consistent or guaranteed, so taking on the extra work might not be worth the effort, especially if it becomes a detriment to your mental and physical well-being. Paying debt down faster can feel really nice, but taking time to yourself is also priceless.
Stick to a monthly budget based on what you have after your bills are paid
Under normal circumstances, she suggests allocating 20 percent of your take-home pay towards paying your debt down. That might not be feasible for many people right now, especially those who were laid off or furloughed and are stretching every dollar as it is.
“If you can, have all of your bills, including debt repayments, auto-drafted from your account on the same day, so you know what you have left for flexible expenses for the rest of the month,” she says. “Even if your monthly income is lower than expected, this ensures you can still cover your fixed expenses and debt repayments, while giving you an opportunity to re-evaluate your spending habits.”