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Customized financing to consolidate high-interest debt or fund major purchases or expenses.
The Federal Reserve’s Q2 2024 report on household debt and credit highlights the ongoing challenges Americans in debt face. Aggregate debt balances on mortgages, home equity lines of credit (HELOCs), credit cards, and auto loans continue to rise. This rising debt presents a barrier to creating financial stability and, in turn, the freedom to enjoy the funds you work so hard to get.
The good news is there are many approaches to paying off debt that can help ease the burden. In this article, we’ll explore three key steps to consider when paying down debt.
Before you develop a plan to get out of debt, it’s important to understand exactly how much you owe. Create a list of each debt you have and note:
Organizing your debts into a list can provide clarity on their scope and help you determine the most effective repayment strategy. A key way to assess how manageable your debt is involves calculating your debt-to-income (DTI) ratio. Your DTI ratio considers how much you’re paying toward debt as a percentage of your gross monthly income.
A DTI ratio of less than 40% is typically considered manageable, while anything over 50% indicates an inability to take on more debt and potential problems managing existing debt. Since lenders will review your DTI ratio before offering you a loan, it’s a critical figure to know before you apply for financing.
With a complete list of your debt and your DTI ratio in mind, you can begin to think about a realistic strategy to repay what you owe.
There are three main debt repayment strategies that may be worth considering depending on your debt burden and financial goals.
Debt consolidation is a tactic to shift multiple high-interest debts into one loan with a single monthly payment. For well-qualified borrowers, a debt consolidation loan offers a lower interest rate, which can save you money on interest while streamlining debt management. You might consider consolidating debt if you have a lot of unsecured debt, like credit cards, for more manageable monthly payments.
With the debt snowball, you’ll pay off your smallest debt first, regardless of interest rate, while continuing to make minimum payments on all other debt. Then, once that debt is paid off, roll the money you were putting toward it into the second lowest balance debt. The idea here is to create momentum, like rolling a snowball down a hill that will inevitably gain weight and speed as it goes. Ideally, your motivation will build after repaying the first debt, and you will be encouraged to continue until your largest debt has been paid in full.
With the avalanche method, you start with the highest interest debt first, regardless of balance, while continuing to make minimum payments on all other debt. Similar to the snowball method, once the debt is paid, you’ll roll the payment you were making into the debt with the second highest interest rate. The avalanche method is a way to maximize interest savings since you’ll be rid of the highest-interest debt first.
The best way to pay off debt is by choosing a strategy you can commit to following for the long term or until your debts are paid. If you’re someone who relies on quick wins to stay motivated, the debt snowball may be the better choice. However, if you’re motivated by saving money, a debt consolidation loan or the debt avalanche might be a better fit.
After committing to repaying your debt, it’s important to adjust your spending habits to avoid accumulating more debt. There are several helpful changes in habit you can implement, including:
Big, sweeping changes like consolidating debt, can be impactful when you’re getting out of debt. But small, steady habit changes can also have a big impact over time. The most important thing is that you start to take steps to get out of debt, leveraging financial tools and education at every stage.
BHG Financial offers debt consolidation loans of up to $250,0001 with loan terms of up to 10 years1,2 to help you streamline high-interest debt repayment. Start today by contacting our dedicated concierge support team or checking your rate online at no cost, with no commitment and no impact on your personal credit score.3
Not all solutions, loan amounts, rates or terms are available in all states.
1 Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile.
2 Personal Loan Repayment Example: A $59,755 personal loan with a 7-year term and an APR of 17.2% would require 84 monthly payments of $1,228.
3 There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.
Annual percentage rates (APRs) for BHG Financial personal loans range from 11.96% to 27.87%, with terms from 3 to 10 years.
No application fees, commitment, or impact on personal credit to estimate your payment.
Consumer loans funded by Pinnacle Bank, a Tennessee bank or County Bank. Equal Housing Lender.
For California Residents: BHG Financial loans made or arranged pursuant to California Financing Law license - Number 603G493.
IMPORTANT INFORMATION ABOUT ESTABLISHING A NEW CUSTOMER RELATIONSHIP
To help the government fight the funding of terrorism and money laundering activities, Federal law re-quires all financial institutions to obtain, verify and record information that identifies every customer. What this means for you: When you apply for a loan, we will ask for your name, address, date of birth, social security number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If all required documentation is not provided, we may be unable to establish a customer relationship with you.
* “Quarterly Report on Household Debt and Credit (Aug 2024)”, https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2024Q2. Accessed October 14, 2024