Deciding what to do about your debt involves exploring all the debt relief options available to you. Figuring out which one is best for you can consume a lot of time, considering you have to call each company for a consultation to see how much you can save. You can do your own evaluation by using a simple credit card debt calculator such as the one from CNN Money. Just run the calculation with various numbers to represent your scenarios.
Start by making a list of all your debts, the current balance due, the minimum payment, and the interest rate.
Can you pay on your own?
The first option is a pretty straightforward calculation. Enter the details of each debt into the calculator, then choose one of the plan options: minimum payments, fixed payment, or debt-free. You’ll use each of these for a different debt relief option.
If you can afford the minimum on your debts, choose the minimum payment option. But, if you can afford to pay more, use the fixed payment option. Paying more than the minimum, even if it’s just $100 or $200, can save a significant amount of repayment time and interest.
Consider four debts: $1,000 at 7.9%; $2,500 at 11.9%; $7,000 at 15.9%; $12,000 at 19.9% all with 3% minimum payments. The total minimum payment for these accounts would be $665. It would take 22 1/3 years and $20,376.24 repay your debt. Paying an extra $200 each month would have you finished in 2 2/3 years and just $5,080.40 in interest. The extra $200 makes a big difference.
What if you can’t afford the minimum?
Then you’d probably try credit counseling first. A credit counseling agency would be able to lower your minimum payment and interest rate to make your debt more affordable. Let’s say credit counseling could lower your average interest rate by 4% and your minimum payment to 2%. They’d also want you to pay off your balance in 4 to 6 years. The payment would be $482.02 for 6 year repayment, $537.78 for 5 year repayment, and $624.71 for 4 year repayment. Those numbers don’t include the credit counseling fees.
What about consolidation?
A consolidation loan would combine all your balances at a (hopefully) lower interest rate. Use the calculator to estimate a consolidation loan. Enter just one account with the balance as the total amount of your debt and the interest rate you’d expect. Enter anything for the minimum payment (e.g. $5), choose the dead-free deadline option, and enter the loan term you’d like, e.g. 5 years. Using the example above, a $500 payment would be required to pay off a $22,500 debt consolidation loan at 10%. The longer your term, the lower your payment would be.
Debt settlement savings
Debt settlement’s goal is to reduce your balance by 40% to 60% and have all accounts settled from four to six years. Use a regular calculator to calculate 40% and 60% of your balance. (Just multiple your balance by .4 and .6). Then use the CNN’s repayment calculator for each scenario at 0% interest rate, any minimum payment, and use 4 and 6 as the debt-free deadline to see the monthly settlement payment needed to settle your debts in that timeframe. A monthly payment of $281.25 would be necessary to settle $22,500 debt at 6% in four years.
Use this method as a preliminary analysis of your debt relief option, then choose which one you’d like to pursue further. Don’t forget to consider the disadvantages of each option.
This guest post was written by Eliza Collins, who is a personal finance writer specializing in saving strategies, alternative income and debt relief options. You can read more of her articles at the debt settlement blog.