While financial institutes profit from individuals and businesses taking on loans, people are put in a situation where they sometimes have to pay far above what was borrowed as a result of interest and late payment fees. This of course causes significant strains on a person’s finances. According to the CNBC report, the average debt per person in the United State of America in 2021 was $90,460. This includes credit card debt, mortgages, and student loans. The US federal reserves estimate that the average American owes $ 32,731 in student loans while some people owe up to $200,000. Bringing this down to Nigeria, in the first quarter of 2021, Nigeria’s total debt profile increased to NGN 33.11 trillion resulting in a debt per population of NGN 163,000. Having an increase in debt results in an increase in the amount to be repaid which leads to a reduction in residual income for savings and investments. Having to make large repayments reduces the household’s ability to purchase other essential items which has an adverse effect on the well-being of individuals. Beyond the financial impacts of debt, studies have shown that debt leads to stress, anxiety, and depression. In this article, we explain the steps you can take to dig yourself out of debt.
Step one: Know who you owe
The first step to dealing with any problem is to acknowledge that there is a problem. You need to take inventory of your loans and figure out how much you owe. You need to make a list of the financial institutions and other individuals you owe money to including the amount owed and the interest rates.
Step two: Prioritize repayment
The next step is to prioritize the repayment of the debt in order of interest charges. It is important to pay attention to loans that attract higher interest rates as delays in the settlement of those loans would lead to an increase in interest to be paid on those loans which would in turn increase the amount being owed.
Step three: Avoid further debt by making payments on time
Making early payment is vital to maintaining a good credit score. By paying your bills on time, you establish a pattern of being a trustworthy debtor which increases your credit score and in turn reduces interest rates on future loans. This is particularly important for people who want to apply for mortgages in the future. A good credit score reduces the interest rate on your mortgage.
Step four: Renegotiate the terms of the loan
Depending on your relationship with the lender, you can attempt renegotiating certain terms of the loan to facilitate prompt repayment of the amount owed. This can include negotiating a lower interest rate to reduce additional payments to be made or negotiating a freeze on interest payment and an accelerated payment plan to ensure you get out of the debt early.
Step five: Save up
Building up your savings would allow you create a pool of funds to assist with unforeseen expenses and avoid taking on more debt in the future. You can start this by creating an emergency fund. An emergency fund is a pool of fund set aside or saved up for unexpected expenses. This fund is treated like a separate savings account used to cater for unforeseen and unplanned expenses. To learn out to build an emergency fund, please click on this link to read our previous article. How to build an emergency fund.
We hope the steps outlined above helps you make that journey out of a life of debt. Do have a great week ahead.
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DeMatteo, M. (2021, November 18). The average American has $90,460 in debt—here’s how much debt Americans have at every age. CNBC. Retrieved April 10, 2022, from https://www.cnbc.com/select/average-american-debt-by-age/
Digging Your Way Out of Debt in 8 Steps. (2021, August 17). Investopedia. Retrieved April 10, 2022, from https://www.investopedia.com/personal-finance/digging-out-of-debt/
New York Life. (2021, December 2). 6 Tips to Avoid Long-term Debt. Retrieved April 10, 2022, from https://www.newyorklife.com/articles/avoid-being-young-and-in-debt
Oyekanmi, S. (2021, July 19). Nigerian states with the highest debt per population. Nairametrics. Retrieved April 10, 2022, from https://nairametrics.com/2021/07/19/nigerian-states-with-the-highest-debt-per-population/
Song, J. (2022, February 25). Average Student Loan Debt in America: Facts & Figures. ValuePenguin. Retrieved April 10, 2022, from https://www.valuepenguin.com/average-student-loan-debt#:%7E:text=Average%20Student%20Loan%20Debt%20in%20The%20United%20States,outstanding%20in%20student%20loan%20debt.