5 Tips to Reduce Debt

One of the first steps to managing your finances well is to know where you stand with debt. People use and go into debt for many reasons depending on our financial situation, life needs, and personal preferences. Debt can be classified into four main categories: secured, unsecured, revolving, or mortgaged. Below are 5 tips for reducing debt and paying debt off faster.

Create a Spending Plan Now

If you are using a spending plan already, great! If you are not using a spending plan, start using one today. To manage your finances well, you must know where your money is going, and a spending plan helps you to do that. Recording your transactions is a great habit and understanding your cash inflows and outflows is a great way to uncover new ways to save.

With some planning and managing, you can reduce the stress of borrowing and improve your financial health while reducing debt. Creating and using a spending plan will also help you live within your means and not have to use credit on everyday items like gas and groceries.  

Pay More Than the Minimum

Paying as little as $10 more than the minimum on your debt payment will help pay your debt faster and save you money in interest. For example, if you have a credit card with a $1,000 balance and an 18% interest rate and pay only the minimum monthly payment, it will take almost three years to pay off the balance. The total price would be about $1,304, meaning you are paying out $304 in interest alone.

On the other hand, using the same balance, interest rate, and minimum amount due, let’s say you pay more than the minimum due each month. If you were to pay an additional $60 each month, or a total of $100, it would take just 1 year to pay off the balance, and the interest paid would be reduced to $103, a significant saving.

It makes a big difference to pay more than just the minimum due, in both the time it takes to pay off debt and how much you end up paying. Of course, the optimum plan would be to pay the balance in full each month and avoid paying interest altogether, but the most important thing is to make sure your payments fit your spending plan. 

Make Biweekly Payments

Instead of paying your mortgage once a month, slice your payment down the middle and send half every two weeks. Why? There are 52 weeks a year, so this works out to 26 biweekly payments, meaning you would pay 13 total payments.

Biweekly mortgage payments don’t save you money by lowering your interest rate; they save you on interest by paying your mortgage earlier. When you pay your principal balance down faster, there’s less interest and less debt.

Choose One Debt and Pay it Off

Two approaches to this strategy are snowball or avalanche methods of debt reduction. In the avalanche method, you pick the debt with the highest Annual Percentage Rate (APR), attack it until it’s paid off, then move to the next highest APR. This will reduce the largest chunk of money you’re spending on interest.

With the debt snowball method, you focus efforts on the smallest balance. When your first debt has a zero balance, you take the amount you were paying towards that debt and use it to pay down the next debt on your list, paying off that debt quicker, and so on. Once you move all your debts to a zero balance, you can begin applying all your debt repayment spending plan items toward your savings to help you reach your long-term goals.

Use Savings to Pay Debt

If you owe more in interest on your debt than what you are earning in interest on your savings, you may want to use some savings to reduce your debt.

Paying down high-interest debt with savings may be a better use of your money. While it’s essential to build up your savings for many reasons, such as having money to pay for emergency expenses, there are times when that money may be more helpful in paying off debt. Paying off high-interest debt is one.

Reducing debt is always a good idea, and the 5 tips for reducing debt above can help pay off debt. Using a spending plan, paying more than the minimum, and paying off debts early, will save you interest. And with your debt paid off, you can put more of your money into saving and financial goals. Comment below; I would love to hear from you.


Secured and Unsecured Debt

What is the difference, if any, between secured and unsecured debt? Both are debt, and isn’t debt, debt? What makes unsecured debt different than secured debt? Well, let us take a look and see.

What is Unsecured Debt

Unsecured debt is a finance term that refers to any debt obligation that is not collateralized. Collateral is something of value you own or an asset you put up to secure a loan or debt obligation. With unsecured debts, there is no tangible property or other product attached to that debt.

In the case of unsecured debt, a lender loans money without the security that an underlying asset provides. 

With unsecured debts, lenders don’t have the right to any collateral for the debt. If you fall behind on your payments, they don’t have the right to take any of your assets. However, the lender may take other actions to get you to pay. For example, they will hire a debt collector to collect the debt. If that doesn’t work, the lender may sue you and ask the court to garnish your wages or take an asset. The lender can also put a lien on another of your assets until you’ve paid your debt.

Examples of Unsecured Debt

Typical unsecured debts include credit cards, medical bills, student loans, and store credit cards where you do not have to put up any material as security for the debt.   

Also called signature loans or personal loans, borrowers often use unsecured debt for purchases such as computers, home improvements, or unexpected expenses. 

An unsecured loan means the lender relies on your promise to pay it back and nothing more. For this reason, unsecured debt carries more risk for the lender, making the loan more expensive. The more additional risk a lender must take on, the higher the rate of interest a borrower must pay, making unsecured loans subject to higher interest rates. Additionally, you have set payments over an agreed period, and penalties may apply if you want to repay the loan early. 

What is Secured Debt

In contrast to secured debt, if the creditor can take an item of property away from you to cover the debt, you are working with a secured debt. The creditor will sell the asset if the lender must take your asset because the account becomes delinquent. If the selling price for the asset doesn’t completely cover the debt, the lender may pursue you for the difference.

The fundamental difference between secured and unsecured debts is that tangible items are attached to the debt. Debts such as mortgages and car payments usually have tangible items attached to them, i.e., your house or car. Secured debts are tied to an asset and considered collateral for the debt. Lenders place a lien on the asset, giving them the right to take the asset if you fall behind on your payments. So, for example, your mortgage loan is secured by your home, and auto loan by your vehicle.

In a secured debt situation, as the borrower or person seeking the loan, if you were to file bankruptcy, failed to pay the debt obligation, or failed to meet the terms for repayment, the asset that secured the loan that you put up to cover the loan, would cover the debt.

Debt and Bankruptcy

The big difference between the two types of debts happens or is applicable when someone files for bankruptcy. In Chapter 7 Bankruptcy, you can choose to keep the product or property and pay off the debt in some way. But if it is decided that you cannot pay at all, you also have the option of giving the product or property back and paying off your debt that way. On the other hand, in Chapter 13 Bankruptcy, you are allowed to keep the merchandise or property, but you will be allowed to pay off your debt according to the Chapter 13 plan.

There you have it—the difference between unsecured and secured debt. There is a difference, and it can be a big one. Know what you are getting when you take on debt. Is it secured or unsecured? Comment below. I would love to hear from you.