A Simply Plan to Clear Your Debts

By: Donald Saunders

One of the biggest problems for many people nowadays is that it is very easy to recognize that you have a debt problem but? to recognize exactly how large the problem is. You might be surprised to discover that a significant proportion of those people with debt problems have no idea how much they actually owe or how much they are paying out in interest on their loans each month. As a result, your first task in sorting out your debt is to find out exactly how large your problem is.

Sit down and list out all the debts which you currently have, detailing how much of your original debt remains outstanding and how much you are currently paying each month. You should also separate out each payment to show how much of the payment is a repayment of the original loan and how much is simply interest.

You could be stunned by what you see, not just in terms of how much you actually owe, but in terms of how much of your monthly income is simply being used to repay interest. For instance, if you are earning $4,000 a month and are paying $400 every month simply in interest then this means that you are paying out 10% of your monthly income without actually reducing the total amount you owe. Now this may not sound too bad, but take it one stage further. If $400 is the maximum you can afford to pay out each month then you could go on paying this sum for years without your debt going down at all.

With a bit of luck the difference between the amount which you are paying in interest and the amount being used to repay your original loans will be more realistic and it is hard to quantify precisely what this should be because it will change from one loan to another. In a normal home loan for instance it is not unreasonable to be paying 90% interest and 10% principle in the starting years of a mortgage, but you assuredly do not want to be paying this with your credit card debt.

Once you have calculated the extent of the problem the next thing you should do is to construct a plan to clear your debt as quickly as possible. Here you are going to have to calculate how much you can afford to pay every month and then decide how this amount should be divided between your various different debts.

One possible answer is occasionally referred to as the 'snowball' approach and involves clearing your smallest debt first. You will then have a greater sum of money to pay off the remaining debts and can steadily work your way up to your biggest debt.

Another answer to the problem is to tackle your largest debt first and thus save the most money in essentially wasted interest payments. This is not an easy method however and progress tends to be slow making it hard to keep to this plan.

Whichever course you decide to follow you must not just ignore some of your debts while you clear the others or you will run into trouble with your lenders and cause problems with what might already be a damaged credit record. If you find that meeting at least the minimum payment on all your loans then you will have to speak to the lenders concerned and see if they are prepared to assist. The majority of lenders will have a debt reduction settlement program and they may well agree to assist you by accepting reduced payments for a short period, or possibly even to waive your payments for one or two months, if you explain your problem to them.

If you have got yourself into a mess and are trying to work out how to deal with your debt then do not make matters worse than they already are by taking on more debt. This may appear obvious but you would be surprised how many people try to borrow their way back into the black. This never works and simply makes an already bad situation much worse.

Debt, Loans & Business Cashflow
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