How to Pay Off $10,000 in Debt
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It’s so easy to find ourselves in debt. With the rising cost of living and interest rates skyrocketing, it can feel impossible to pay off debts, especially if we’ve been holding onto them for a while. And as nice as it is to have savings built up to handle unforeseen expenses, it’s not always a realistic option. So, as much as we might not want to, taking out a loan or using our credit cards more often may be the only solution.
In this article
How to pay off debts
Whether you have exactly $10,000 in debt or not, if you have debts to your name, you’ve probably spent at least one sleepless night worrying about it. The good news is that people have plenty of options to pay off their debts, even if their financial situation isn’t perfect. It’s all about understanding your options and deciding which is best for you. Whether you just need help organizing your payment plans or you find yourself unable to pay back your debts, there are options for you to consider.
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Methods of paying off debt
When it comes to paying off debt, most people use two main methods. The avalanche method and the snowball method both require you to make a plan and make it simple for you to follow it.
Debt avalanche method
The debt avalanche method aims to pay off your debts while saving the most in interest payments. With this method, you’ll begin by writing down your debts and monthly minimum payment for each debt. Then, you’ll arrange the debts in a list that goes from the highest interest rate to the lowest interest rate.
When you use the avalanche method, you’ll continue making all your monthly minimum payments. Then, you use any extra money to make another payment on the debt with the highest interest rate. You’ll continue to do this every month, and eventually, you’ll be able to pay off the debt with the highest interest rate and move on to knock the rest out as well.
The major benefit of using the avalanche method is that it can help you save money in the long run. By putting your extra funds toward the debts with the higher interest rates, you can pay those off sooner and no longer worry about those high-interest rates. However, for this method to work, you must have extra cash to make those payments.
Debt snowball method
The debt snowball method focuses on paying off the smallest balance debts before moving on to the larger ones. Like the avalanche method, you’ll make a list of your debts and what the minimum payments are for each. Then, you’ll list them from the smallest to the largest amount of debt. You’ll also make your minimum monthly payments for each debt using this method.
With this method, any money left over after meeting the minimum monthly payments should go toward making an extra payment on the smallest debt. As you pay off the debts, you’ll continue moving on to the next largest amount until they are all paid off. Of course, for this to work, you need to have disposable income to make extra payments toward your debts.
This method can be a good motivational tool for some people. By paying off the smallest debts first, you can climb the ladder of paying off your accounts. Theoretically, each debt you pay off will motivate you to stick to the method until you have paid off all your debts. The downside is that since you’re not considering interest charges, you could pay more money in the long run.
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Products and services that can help you become debt-free
If you’re concerned about debt management, understanding the popular methods of becoming debt-free is a good starting point. But if you don’t have the funds to pay off your debt using those methods, you’ll probably be looking for other options. In this case, you might want to consider other methods for your debt payoff.
Debt consolidation
Debt consolidation might be a good option for people struggling to manage multiple debts. It allows you to combine all of your debts into a single payment. In some cases, it can also help you save on interest rates and help you pay off your debt sooner.
There are a few debt consolidation options to choose from. You’ll want to review interest rates and qualification requirements to determine which one is best for you. This will allow you to identify the option to save you the most money.
Balance transfers
If you have credit card debt, a balance transfer credit card could help you pay it off. You’ll need to find a balance transfer offer to use a balance transfer. Some credit cards offer a 0% introductory interest rate on balance transfers if you open a new credit card. To use the offer, you’ll transfer the balance from an old credit card to a new credit card.
The introductory interest rate only lasts for a limited amount of time, which will be stated on the offer. It’s usually anywhere from 6 months to 18 months long. So, while it doesn’t last forever, it can help you save money on interest and pay off old credit card debt faster. Credit cards with 0% balance transfer interest rates are usually only available to people with good credit, so it might not be an option for everyone.
Debt consolidation loans
A debt consolidation loan is a loan you take to pay off your other debts. With these loans, the bank or financial institution will pay off your debts for you, and you will owe the bank or financial institution. This option can be beneficial because it allows you to consolidate your debts into one place, so now you only have a single repayment to worry about. You’ll also only have one interest rate to keep track of, so you won’t have to consider whether you want to use the avalanche or snowball methods.
Debt consolidation loans really aren’t all that different from personal loans. When you work with a bank, you should have the opportunity to discuss your needs and review your options. The bank advisor can help you decide whether a personal or debt consolidation loan will be a better option. The biggest thing to look for is your repayment period and the interest rate for your new loan. Ensure you can afford the monthly payments and are comfortable with the terms it offers.
Line of credit
Lines of credit are similar to credit cards in that they provide a revolving credit line. You can borrow up to your limit as much as you want and only pay the interest on the amount you borrowed. You can use your line of credit to make purchases via a card or a check, making it more flexible than a credit card.
There are a couple of differences to be aware of if you’re trying to decide between a line of credit and a credit card. Unlike credit cards with introductory period balance transfer offers, a line of credit will start charging you interest on your purchases immediately. Lines of credit also tend to come with a time limit, so you can only use it within a predetermined time period. Once the period is over, you’ll have to repay your outstanding balance during a repayment period that will also take place over a set period.
Home equity line of credit
If you own a home, a home equity line of credit (HELOC) may be an option. They essentially give you a revolving line of credit that you can repeatedly use to pay off your debts over time. With a HELOC, you’ll have a term period to use the funds. However, you’ll have the option to only tap into the line of credit when needed. This means there is more flexibility when it comes to your payments.
Unlike other types of debt consolidation, a HELOC allows you to borrow only as much as you need when needed. This can make it a good option if you just need extra funding to pay off your debts quickly. It can also be good to have in other cases, such as if you’re working on improvements or renovations on the home. That being said, if you’re struggling with meeting your current debt payments, this might not be your best debt consolidation option.
Home equity loans
Homeowners may also want to consider home equity loans. With these, lenders will grant a fixed-term home equity loan based on the current equity you have in your home. These loans are also referred to as a “second mortgage.”
You start by applying for a specific amount to get a home equity loan. If you plan to use the loan for debt consolidation, you should request the amount you need to pay off your current debts. When approved for a home equity loan, you’ll have a loan term over which you’ll make fixed payments at a fixed interest rate. Instead of managing several loan payments, you can use the loan funds to pay off your debts and repay your home equity loan.
Debt settlements
Debt settlements may be an attractive option for people who are really struggling with paying off their debts. It allows you to pay off your debts for less money than you owe, but it’s not for everyone. You’ll have to communicate with your creditor and agree on a debt settlement to work for you.
This option should only be used if you cannot afford to make the minimum payments on your outstanding debts. To get a debt settlement to work for you, the creditor needs to accept the fact that they won’t get the full amount of money that you owe from you. If you’ve been meeting your minimum payments, there is little incentive for the creditor to agree to accept less money from you.
If you’re in a position where debt settlement is the best option, you’ll have a few options. First, you can try to work with your creditors on your own. This involves contacting representatives at your creditor’s company to request a settlement. When you do this, you must ensure you have enough money to meet your end of the agreement. Debt settlements cancel out your debt for a lump sum fee. So you should only offer a settlement amount you know you can pay immediately.
The other option is to work with a debt settlement company — also known as a debt relief company. When you use this option, you’ll have to consider the additional fee you will have to pay for hiring someone else to handle the process. Fortunately, you won’t owe the debt settlement company anything in most cases unless they can negotiate a settlement for you. However, you also need to consider that you may have to pay account management fees if the debt settlement company gets you an agreement allowing you to repay your debt over time.
Whether you handle debt settlements on your own or hire a company, you should be aware that this process can significantly negatively impact your credit score. You’ll also need to look into your settlement's tax requirements to ensure you won’t owe more money. Additionally, no creditor is guaranteed to accept a debt settlement.
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The costs of paying off your debts
Paying off your debts might seem like a no-brainer when making financial decisions. That being said, there are some costs associated with getting out of debt. Keep these in mind when you’re picking your debt payoff solution.
Balance transfer fee
Credit cards with no or low interest on balance transfers can be attractive. But the low-interest offer doesn’t mean that it is entirely free. Most of these cards charge a one-time fee when you transfer a balance to the new credit card. The fee is typically a percentage of your transfer amount, which can vary. You may also be able to find some cards that offer a no or low transfer fee as part of the introductory offer.
Interest rate
Most debt payoff options come with an interest rate. You can think of the interest rate as the fee that the creditor or lender charges you for letting you borrow money. With each payment you make, part of it will go toward your interest and part toward your principal payment. This is why it may be a good idea to consolidate your loans. Even if it doesn’t give you a lower interest rate than some of your loans, it might still be lower than all of your current debts combined.
Your credit
This might not be a financial cost upfront, but it can be in the long run. When you consider your options, be sure to consider your credit report. If you become delinquent on your payments or settle a debt, it could hurt your credit, which will last for a while. A lower credit score could lead to denied credit and loan approvals in the future and higher interest rates.
Pros and cons of paying off $10,000 of debt
Pros
- Paying off debts will lower your credit utilization rate, positively affecting your credit score.
- Paying off debts can help free up money for other uses, such as putting it into savings.
- Some debt payoff options may allow you to pay less money in the long run for your debts.
Cons
- Some debt payoff options rely on becoming delinquent on your debts, which can hurt your credit score.
- Allocating your extra money toward paying off debts beyond the minimum monthly payments might have negative financial consequences in other areas of your life. For example, if you’re putting all your extra money toward paying off a student loan, you’ll have less money toward other goals, such as a down payment on a house.
- Some methods of paying off debt can contribute to an unhealthy financial lifestyle. It’s important to be realistic with yourself and your spending habits to get out of debt for good.
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The bottom line
There is no shame in having debts to your name. For most of us, very few people in our lives don’t have some form of debt. Paying off your debt relies on many factors, including the interest rate on your debts and your income compared to your cost of living. Sometimes picking up a side hustle can help, but sometimes that isn’t enough.
When you think about getting out of debt, it’s important to think about your options. If you just need help putting a plan together and sticking to it, the popular debt avalanche and debt snowball methods could help. If you don’t have the funds to pay off your debts, you may need to consider other options. Remember to think about your long-term financial goals in addition to your desire to pay back your debts. If you’re unsure, looking into financial counseling to help you figure out the best path forward doesn't hurt.
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Ashley Hart is a lead copywriter and digital marketing expert covering finance, law, real estate, music, entertainment, health and wellness.
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