How Do I Get Out of Debt?

Did you know that the average American owes $105,056 in debt? If you have mortgage, auto, student, personal, and other loans, as well as credit card debt, you’re certainly not alone.

Managing debt effectively and eliminating debt are among the most common goals people have in our world today. Understanding how interest works is a crucial first step in gaining control over your finances.

In this Tower Loan article, we cover how to calculate loan interest, its impact on your repayment process, and strategies to minimize interest and get out of debt.

What Is Loan Interest?

Loan interest is the cost of borrowing money that your lender charges for the use of their funds. It is usually expressed as an annual percentage rate or APR. Lenders charge you interest in addition to your principal, which is the original loan amount.

It’s crucial to understand interest if you’re looking for answers to “How do I get out of debt?” Interest impacts how long you’ll be living in debt and how much money you’ll pay by the end of your loan.

How Loan Interest Is Calculated

There are two types of interest related to how to get out of debt.

Simple interest is the interest you calculate only on the original principal and is common with short-term and fixed-rate car titles and personal loans. If you have a $10,000 loan for three years at an 8% interest rate, you will multiply $10,000 x 3 x 0.08 to arrive at $2,400 of total interest.

However, amortized interest is more common with mortgages and longer-term auto and installment loans. With amortized interest, the interest is front-loaded, meaning you pay more of it early in the loan and less later on. Each month, you must recalculate the amortized interest.

Doing so involves dividing your annual interest rate by 12 (months) and then multiplying that number by the remaining principal to get the interest figure. Finally, subtract the interest from your fixed payment amount to arrive at the principal paid.

How Interest Calculation Helps with Eliminating Debt

When you speak with a financial advisor, you’ll learn many ways to reduce or eliminate debt. However, accurately calculating interest and keeping track of your interest expenditures can significantly impact the total cost of your debt in the long run.

The primary distinction to remember about interest is that simple interest offers more savings upfront and rewards you for early payoffs. But with front-loaded amortized interest, extra payments early on in the life of your loan can reduce your long-term costs.

Reducing Interest to Get Out of Debt Fast

If you want to start eliminating debt and get out of debt fast, here are some strategies to consider.

Find the Lowest Interest Rates

Shop around with various lenders to find the best rates, as this borrowing money with a loan may have advantages over balance transfers and refinancing.

You can use a balance transfer calculator to determine if the fees are worthwhile. You might also consider 0% promotional APRs, but be sure to read the fine print to understand the offer’s duration and any additional hidden fees.

Pay More than the Minimum Required

Another approach for how to get out of debt is to pay more than the minimum because paying only the lowest possible amount stretches your debt out for longer.

Let’s say you have $1,000 in debt at a 20% APR, a $35 minimum payment, 42 months to repay it, and $482 in interest. Increasing your monthly payment from $35 to just $50 will reduce your repayment timeframe to just 23 months and your interest to $121.

Try to Avalanche or Snowball Methods

Financial experts sometimes recommend the avalanche method to decrease debt. It involves paying off your high-interest debts first to save the most money on interest costs.

Pros:

• Fastest overall payoff
• Save money on total interest
• Reduce the overall repayment cost

Cons:

• Requires a lot of discipline
• Can take a while to see progress in eliminating debt

Another strategy is the snowball method for how to get out of debt. You’ll pay off your small balances first for quick wins and a more manageable debt load.

Pros:

• Easy approach to follow
• Builds momentum and motivation to decrease debt
• Small debts quickly disappear

Cons:

• Slower payoff for growing high-interest debt
• May result in more interest overall in the end

Make More Frequent Payments

Ways to reduce or eliminate debtmay also involve making additional payments on your debt or splitting your monthly payments into biweekly payments. If you receive a work bonus, tax refund, or side gig income, you can apply this money directly to your debt.

Avoid More Interest Accumulation to Get Out of Debt

However, a significant part of how to get out of financial debt involves not accumulating more debt than you already have right now. Adding onto an existing challenging debt burden will only compound the financial issue for you in the future.

Stop Taking on New Debt

If you have trouble controlling your spending, leave your (non-emergency) credit cards at home when you go out. You can also delete payment information that you’ve saved on websites to make online shopping a little less easy and convenient.

Creating some friction in your discretionary spending may help limit impulse buying when you’re figuring out how to get out of debt.

Build Up Your Emergency Savings

For many people, managing debt effectively requires setting up an emergency savings account that you only access in true emergencies. Without such funds, new debt tends to replace old debt as soon as you pay it off.

A good goal is to start by putting $1,000 in an emergency savings account and work up to save three to six months’ worth of essential expenses in case you need it in the future.

Work on Your Budget and Track Spending

Budgeting and tracking spending are essential to eliminating the debt you currently have and preventing an endless cycle of debt that feels beyond your control. You can use free budgeting apps or tools provided by your local financial institution to create a budget that works for you.

As you get more honest and familiar with your daily, weekly, and monthly spending, identify recurring expenses that you can cut out. These types of non-essential expenses may include underutilized subscriptions, dining out, and frequent and high entertainment costs. Any money you’re able to save from these cuts can be freed up to apply to your loan principal as a strategy for how to get yourself out of debt.

Online Tools to Get Out of Debt

Fortunately, there are many online tools that you can use to keep track of your loan, interest, and payoff schedule.

For example, a quick search will lead you to a free simple loan payment calculator and amortization calculator. There are also loan early payoff calculators that inform you how much interest you can save by paying more on your loan early.

If you need additional resources beyond the basic online tools available, banks, government agencies, and credit counseling services may be able to provide further guidance.

Long-Term Habits to Get Out of Debt

Once you get out of debt, the goal is to stay out of it and maintain financially healthy habits for long-term stability and security.

One way to prevent future debt is to avoid carrying over balances from one month to the next. Make your credit card spending intentional, and limit your charges to what you can repay in full without having to split the amount into multiple payments.

When managing debt effectively, remember that interest rates fluctuate annually. It’s beneficial to review the interest rates on your debts annually and consider refinancing high-interest debts to reduce costs.

Whenever it’s time to make a major purchase in your life, consider using your savings rather than financing whenever possible. When you need to borrow money to afford the total cost, stick to trusted, reputable lenders who care about you and will be there to help you throughout the duration of your loan.

Tower Loan Can Help You with Managing Debt Effectively

Tower Loan is committed to helping our customers borrow responsibly and figure out how to get out of debt once they’ve paid off their loans. We offer competitive rates on our installment loans and have helped hundreds of thousands of people access the money they need, providing them with a bit of time to get their finances in order.

In our various branches, our staff members are happy to discuss how interest rates will impact your loan and overall debt. We are also proud to offer financial education resources and articles about important financial topics on our blog and our app can help you track your loan information.

The best strategy to get out of debt fast is different from one person to the next. However, armed with the relevant financial knowledge, motivation, and all available options, you can take control of your finances and position yourself for a debt-free future.