Paying Off Loans With Loans

Paying Off Loans With Loans

Introduction

Paying down debt under normal circumstances is a serious undertaking, and COVID can add another degree of difficulty. However, with motivation to succeed and a solid plan, you can lay the groundwork to get started.

1. Start with a budget

Anytime you want to make a financial move, like paying down debt, buying a house or starting to invest, you need to start with a budget. Your budget accounts for all of the money coming in and going out each month. A good budget can help you make informed decisions as you create a realistic debt pay off plan. Try this monthly spending plan worksheet to help you get started.

The first step of creating a budget is to look at your income. Make a list of every income source, no matter how big or small, including income from unemployment and any side hustles.

Next, make a list of non-essential spending and expenses you can reduce. Can you find a cheaper cell service? If you’re still paying for cable, it might be time to cut the cord.

To pay off debt, you need to find a balance between paying your monthly bills and finding extra money in your budget to put towards your debt. Any extra amount of money you can put towards your debt is something.

2. Set a debt payoff goal you can achieve

Setting a realistic and achievable financial goal is important, especially amid COVID. We all need to be gentle with ourselves right now, and that extends to finances, too.

Don’t focus on the total amount of your debt. Instead, center your goal on what you can pay each month based on your budget. Setting a goal of putting $400 towards your debt each month sounds much more attainable than thinking about paying off $20,000 of debt, for example. Use this calculator to help you determine your monthly payments and repayment timeline.

If there are changes to your income or expenses, make sure to update your budget and goal throughout the year. You want that goal to stay achievable each month.

3. Use a debt payoff strategy

The debt snowball and debt avalanche methods are examples of debt payoff strategies that can make effective use of the money you have to pay off debt. With both strategies, you’re making the minimum payments on all of your debts. The difference is how you allocate extra money.

The debt snowball method builds momentum by focusing on small, early wins. You find the debt with the smallest balance and put any extra funds towards paying off that debt first. Once your smallest debt is paid off, you move to the debt with the next smallest balance. Paying off a debt in full early on can keep you motivated as you start getting closer to attacking debts with bigger balances.

With the debt avalanche method, you put any extra money toward debt with the highest interest rate first. This can save you money on interest charges by eliminating high-interest rate balances. Once you’ve paid off the debt with the highest interest rate, you focus on the debt with the next highest rate.

Either one of these strategies can be beneficial, although if you have high-interest rate credit card debt, the avalanche may save you more money. You can always start with one strategy and switch to the other to see which one works better for you. Remember, you’re making a dent in your debt anytime you are paying more than the minimum balance.

4. Factor in your student loans

If you have federal student loans, The Department of Education issued a forbearance due to the COVID-19 economic crisis, and it’s set to end on March 31, 2021. Now is the time to start thinking about how you’ll fit those payments back into your budget. Keep that date in March in mind when you’re figuring out your monthly budget, but also consider looking at federal student loan repayment plans.

For those who have experienced job loss, there are income-driven repayment plans that are a lower amount based on your monthly income. You can also consider refinancing federal loans, but you will lose federal student loan protections, like the COVID forbearance.

Private student loan borrowers have fewer options, so it’s likely you’re still making payments on any private student loans you have. You may want to look into student loan refinancing, which is when a private lender pays off your student loans and gives you a new loan with new terms. Student loan refinancing is ideal if you have private student loans, especially high-interest rate ones. Refinancing your student loans can save you a decent amount of money throughout your pay off, although the amount you save on refinancing will largely depend on your interest rate, which is based on credit score.

You can also consider extending your loan term to lower your monthly payment, but the downside is that you can seriously add to your debt. It’s worth researching the pros and cons to see what’s best for your financial situation.

5. Focus on your emergency fund

When I was paying off my $40,000 student loan debt, I put every extra dollar I had towards my debt payoff. Even if I made as little as an extra $3 taking surveys online, it went towards my debt. While those and other efforts helped me pay my debt off in 18 months, I made one major mistake – I didn’t have an emergency fund. Had there been one major unexpected expense while I was paying off my debt – like my truck broke down or I needed dental surgery – I would have been unable to cover that expense and could have wrecked all the progress I made on my debt up until that point.

An emergency fund protects you from debt. It’s how you pay for unexpected expenses, job loss, pay cuts, and more. It can help prevent you from taking on more debt when an unexpected expense pops up. And it’s never too late to start building an emergency fund.

The rule of thumb is to have 3-6 months’ worth of expenses saved up for emergencies, but having $500-$1,000 saved is a good start while you’re paying down your debt. Consider focusing on your emergency fund first. Once you reach that goal, you can reallocate what you were putting in your emergency fund towards your debt payoff.

6. Consider a balance transfer card

A balance transfer card can be a useful tool if you’re trying to attack your high-interest rate credit card debt. Balance transfer cards have low to 0% interest rate promotional periods that give you a chance to pay off your debt at a much lower rate.

Conclusion

In theory, balance transfer cards can be incredibly useful, and they’re not a bad idea if you know you can pay off your debt during the promotional period. However, it does cost money to transfer your balances, which can negate the interest savings in some cases. Further, many people find it difficult to pay off the balance during the promotional period. If you’re relying on your credit card to supplement your income, this probably isn’t the option for you.

If you’re interested in seeing if a balance transfer card is right for you, I recommend using this calculator. You enter your current credit card balances, interest rate, and monthly payment to see if it makes sense financially and will help you pay off your debt.

The final word on paying down debt

Making a plan to pay off debt is an excellent goal, but be kind with yourself. If something happens along the way and you need to adjust your strategy, that’s okay. These tips can help you create a realistic plan that sets you up for success and fuels your motivation to keep moving forward.