Here are the best ways to pay off your debt.
September 10, 2020
1. Budgeting and paying in full with interest
You can try to pay off your debt by budgeting and making more than the minimum payments. If your debt is higher than $10,000, this will be a serious, time-consuming, and expensive process unless your income is above average and you have minimal expenses. There are debt calculators you can use to determine the time and payment it would take to pay off your debt. Let’s look at $10,000 in credit card debt at 20% interest. If you pay $250 a month: You pay $16,616.65 in total over 67 months (5.55 years). What about $25,000 in credit card debt at 20% interest? If you pay $500 a month: You pay $54,200.48 over 109 months (just over 9 years). It’s very important to realize that in order to pay your debt in full in a reasonable amount of time, you will have to stop using the credit – you don’t want the debt to get any higher. If you’re going to stop using credit for an extended amount of time, there may be cheaper options.
2. Finding equity in your home
If you own a home, you can check the equity level. Equity is the difference between the home’s present value and the balance of the mortgage. If there’s significant equity in the home, you may be able to refinance your home and put the debt into your mortgage. With mortgage rates low, this is the cheapest way to pay your debt in full.
3. Borrowing money from a family member
Few of us have a family member who is willing and able to do that. And most of us would rather owe money to a bank than to a relative.
4. Selling assets
If you have valuable assets, you can sell them to pay off some or all of your debt. These would likely have to be significant assets such as vehicles, boats, valuable artworks. Most of us don’t have valuable assets to sell.
5. Credit counselling
This is a solution where you pay back all that you owe at a lower interest rate. There is typically one significantly large monthly payment covering all unsecured creditors. These are not insolvency trustee firms. It is considered “credit counselling” and since you are still breaking the original creditor agreement with each of your creditors, it will lower your credit score. Therefore, if your credit score is going to be damaged, perhaps a better option would be a consumer proposal where you pay back significantly less than you owe in most cases.
6. Consumer proposal
All consumer proposals are filed through the office of an insolvency trustee. A consumer proposal is a legal agreement between you and your creditors to pay back a portion of your debt at 0% interest typically over 60 months (5 years). It is fully open. You can pay the agreed amount as quickly as you wish, but it must be paid in full before the end of the 5-year term. Also, you cannot get 3 full payments behind. If you do, the proposal is annulled and all of your debt comes back with interest. Provided you manage it properly, however, it is an excellent way to eliminate debt in an affordable way.
Most people want to avoid bankruptcy, but in some cases this is the better option. If your debt is high, your income is low, you rent, and you have never filed a bankruptcy before, it may be the cheapest and fastest way to deal with too much debt. There are duties, obligations, and costs involved with bankruptcy, though, so talk with an insolvency professional to clearly understand how a bankruptcy would impact you before moving ahead.