Consumer Comeback Blog

Best Long-Term Strategies to Pay Off Debt

Written by Jeffrey Trull

debt-paymentDebt repayment options like the debt snowball method often lend themselves best to simple, short-term debt problems. But what if you’re looking for a more thought-out, long-term approach to dealing with debt?

Here are some options that go beyond a “just pay it off” strategy with the goal to ease repayment, shorter loan terms, and decrease interest costs over many years.

Reduce the Cost of Debt by Refinancing

Refinancing simply means taking a loan at a lower interest rate with one bank to pay off an existing loan at a second bank that’s charging you a higher rate. By dropping the APR, you’ll make lower monthly payments or reduce the amount of interest paid or both.

Refinancing debt may be a good option, but it often doesn’t come without some costs. Mitchell D. Weiss, a financial services industry executive and adjunct professor of finance at the University of Hartford, warns that you need to look beyond just the annual percentage rate (APR) when transferring balances on credit cards. Weiss points out that the, “additional amount of cash you’ll have to cough up,” from balance transfer fees or closing costs can knock out any advantage of a lower APR.

If you’re unsure how to make the comparison factoring in both interest rate and fees, Weiss recommends using an APR calculator. Add the cost of the balance transfer in to the “Extra cost” box and you’ll calculate the new APR, which can be compared to your current loan APR to see if refinancing is actually saving you any money.

Consider Loan Recasting for an Alternative to Refinancing

As an alternative to refinancing with a new lender, recasting your loan maybe possible by working with your current lender.

When you can afford to put a lump sum towards your outstanding loan principal, like from a bonus or tax refund, you can request to have your loan recast to reflect the new principal balance. This could mean lower monthly payments, a shorter loan term, or a combination of both.

Weiss points out that no matter what recasting option you’re able to negotiate, “your interest bill will be less because your loan balance will be smaller,” costing you less interest while you continue to pay down debt.

Utilize Student Loan Repayment Options

Student loans often take years to pay off. Flexible repayment options allow the extension of the loan term and a lower monthly payment if it’s part of your long-term debt strategy.

If you choose standard repayment, which is the default option, you’ll have up to 10 years to pay everything off. However, there are more flexible options if you’d prefer to take longer to pay it off.

To alter your federal loan repayment schedule, you can apply for options such as:

  • Extended repayment – Lower monthly payments as the term is extended to 12 to 25 years.
  • Graduated repayment – Payment amounts increase over the course of a 10-year repayment term.
  • Income-based repayment – Your monthly payment is based on how annual income. It’s typically capped at 15 percent of discretionary income, and you may even be able to have debt forgiven if there’s still a balance left after 25 years.
Consolidation of your student loans may make the whole process easier to manage when used in conjunction with these repayment plans, too.

Work With Multiple Lenders Through Debt Management and Settlement

Just like with student loans, dealing with other personal debt might be difficult when you’re trying to manage on standard repayment terms for multiple accounts. Instead, looking at other ways to manage and consolidate your debt might be helpful.

Debt management plans allow you to pay off all your outstanding debt under more reasonable terms. After working with a certified credit counselor, a debt management plan is proposed to your creditors. If your plan is accepted, you can make monthly payments through a debt relief agency and have that payment distributed to all of your creditors.

Debt settlement is another option for coping with large amounts of debt. Similar to a debt management plan, you’ll make regular payments that are distributed to creditors. However, with the help of credit counseling, you’ll request to pay only a portion of what’s owed instead of the entire amount. Your creditors must still agree to this plan, and you’ll typically see a hit to your credit score since part of your debt is being written off. Still, this option may be preferable to attempting to pay the full balances on your own or defaulting on loans.

Make Extra Payments Part of Your Budget

For any long-term option to succeed, you must make debt a part of your everyday budget. This means figuring out how much you can afford to pay towards debt and working it into your monthly spending plan.

Ideally, you’ll want to pay more than the minimum on your debt. Knowing how much you can afford will give you a better idea about how much you can go above the minimum monthly payment amount.

How do you take advantage of extra payments? Weiss says it’s easy and you must simply “designate those extra payments to be applied against principal, as opposed to permitting the lender to apply the extra funds against future payments.”

Making even small extra payments towards the principal each month can have an large impact on your loan. Weiss recommends testing out this loan calculator, which works for any type of loan, to see the impact of adding extra principal payments. For example, adding just $50 a month to your payment in the 30-year mortgage example shown will shorten the loan term by almost four years and save about $35,000 in interest payments. Not a bad exchange for the cost of one less trip out to dinner each month.