Developing a Strategy for Paying Loans off in a Timely Manner

You do not need to seek drastic measures, such as modification or settlement in order to get help paying loans. Simple budgeting can have a large impact on how well you manage your debt burden. If you are like most student borrowers, you did not consider your budget for repaying the debts when you took your loans. You will have to work backwards, starting with this fixed expense, in order to develop a budget based on your given income.

Budgeting for Debt

The first essential step is to think of your budget in terms of your income and monthly debt before you consider optional expenses. Start with your average monthly income and cut it in half to determine about how much you can afford to pay toward debts each month. This is a good general rule: half of your income can be comfortably allocated toward rent, auto debts, student debts and credit card debts. Exceeding this amount by any manner will place you in a position where you could miss payments certain months. Do not take any debts that would put you over this limit. If your debts are already over this halfway mark, consider how you could earn more income or reduce other expenses.

Eliminating High Rate Loans

Once you know how much money you can spend on paying off loans, it is time to start prioritizing those loans. First, you should make all minimum monthly payments on every loan. With extra budget, you should start paying off the highest rate loans you have. Many people make the mistake of wanting to close out a car loan or repay a relative prior to repaying a pricey credit card bill. Financially, however, it makes sense to pay off the high rate loans first. Since your student loans may have a low rate, simply make monthly payments on these debts until you have reduced your total debt burden.

Using Bonuses and Extra Cash

Anytime you have a cash bonus, it should go to only two places. Ten percent should go into emergency savings if you have not yet built your emergency fund. The remaining excess should go toward principal payments on your debts. Keep in mind: you may face penalties for paying off some loans prior to schedule. Only reduce the principal if you will not be penalized. There are no penalties on paying off federal student loans early, so feel free to attack this principal any time you have the leeway.

Modifying Where Necessary

You may find you simply cannot reduce your debt burden on your given salary. In this case, it may be time to modify your loans. Consider contacting your student lenders to see if you can restructure the debts for a period of time to reduce the burden. Most lenders will require evidence that the current loan amount and monthly payment is creating a situation where you are in a compromised financial position. If this is not the case, you may not have luck trying to modify the debts. Make sure you truly cannot afford a loan prior to going through this process.

 


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