Strategies and Resources for Getting Out of Debt

Q: What is the average amount of personal debt?

The average amount of personal debt varies by lending category, according to TransUnion® research data. As of June 2023, the average amount financed on a car stood at $29,672; average credit card balances stood at $5,932; average mortgage balances stood at $220,982; and the average unsecured personal loan balance per consumer stood at $11,716.

Q: Should high-interest debts be paid off first?

Making extra payments on your debt with the highest APR can minimize your overall interest costs, but there are some potential disadvantages. The avalanche method may not provide a quick victory if your highest APR debt is also your largest loan balance.

Q: Is it better to pay off debt or save money?

There are some pros and cons to paying off debt quickly vs. saving money . Paying off personal loans early may save money in interest, but making extra payments to creditors can deplete your savings. If you have a 0% APR car loan , you may have little or no incentive to pay that loan off early. If you have a 35.99% APR personal loan, paying off the loan early may be right for you if there’s no prepayment penalty. You may consider your goals and personal circumstances when deciding whether to pay off your debts quickly vs. saving money.

Lantern Comp Guide: How To Get Out of Debt

Sulaiman Abdur-RahmanUpdated September 6, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re wondering how to pay off debt or how to get out of debt fast, there are different repayment strategies you may consider. Below, we’ll outline six steps for getting out of debt and getting your finances back on track.

6 Steps to Get Out of Debt

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There are different tactics for how to pay off debt faster, but the best way to pay off debt is the method that works best for you. If you’re wondering how to get out of debt, follow the six steps below:

1. Add Up Your Debt

Debt can come from a variety of sources, including:

Credit cards

Personal loans

Car loans

Mortgage loans

Student loans

As your first step to becoming debt-free, you can add up all of your debts to see how much you owe overall. Reading your credit report may help you calculate how much debt you’ve accumulated across all of your accounts.

2. Make a Budget

Once you’ve calculated your total debt, create a budget to pay off debt using the following tips:

Determine your take home pay. Review all of your sources of income to determine your gross monthly income. This includes checking any pay stubs and self-employment earnings you typically collect each month.

Record your fixed expenses. Calculate the areas in your budget where you’ll be spending. This includes all necessary expenses, including the payments you’ll make on credit cards and consumer loans.

Set your budget. Knowing your gross monthly income and necessary expenses can help you decide how much to budget toward credit card and loan repayments each month. Refine your budget with the next steps outlined below.

3. Decrease Your Spending

One of the strategies for how to get out of debt is to decrease your spending on nonessential expenses. Decreasing your spending on luxury or nonessential items may free up your budget. When you spend less on nonessentials, you have more income for tackling credit card debt and other balances.You may consider the following:

Dining less at restaurants

Going to the movies less frequently

Canceling or moving to a lower tier on streaming subscriptions

Taking public transportation

Setting spending limits or completely cutting out online shopping for nonessentials

Canceling your gym membership to work out at home

Thrifting your clothes

Canceling vacation plans until you become debt-free

Avoiding amusement parks if you’re overburdened with debt

Choosing a more affordable cell phone plan

Avoiding highway tolls

If you’re wondering how to pay off debt faster, decreasing your spending in nonessential areas may increase your ability to make extra payments toward installment loans. Recommended: Can You Pay Off a Personal Loan Early?

4. Increase Your Income

Increasing your income can be another step to paying off debt. You can use the increased income toward extra payments on your loan and revolving credit accounts.A boost in earnings can free up your budget. You may consider the following:

Earning interest with one of the top high-yield savings accounts

Monetizing social media as a content creator

Earning extra income through a side hustle, such as driving for rideshare or food delivery

Requesting or seeking opportunities to work overtime

Taking surveys that pay cash

Participating in paid medical studies

Pet walking or pet-sitting

Performing in public places or busking for tips

Earning royalties as a self-published author

Recommended: Top 25 Personal Finance Influencers on YouTube

5. Pay Down Your Debt

One of the key steps of how to get rid of debt is to pay down your account balances. Lenders may charge late fees if you miss a required payment when due. If you have federal student debt, you may consider an income-driven repayment (IDR) plan and see whether you qualify for student loan forgiveness programs.Defaulting on a loan can damage your credit, and debt collectors may sue you for payment if the statute of limitations has not run out. Different states may have different laws regulating debt collection practices.Here are some debt repayment strategies to consider:

Debt Snowball Method

The debt snowball method focuses on paying off your smallest debts first. A common way to use the debt snowball method is to pay more than the minimum amount due on your smallest debt, while still paying the minimum amount due on the rest of your debts.The idea is that you repay your smallest debts quickly, and those successes could build your confidence and give you motivation to tackle your larger debts.

Debt Avalanche Method

The debt avalanche method is when you pay more than the minimum amount due on your debt with the highest interest rate, while still paying the minimum amount due on the rest of your debts. Making extra payments on your debt with the highest annual percentage rate (APR) can minimize your overall interest costs.

6. Stay Motivated

Staying motivated as you make required payments on your debts is the sixth step you can take. Some of your debts may take years to pay off, but making at least minimum monthly payments each month can help you make progress. Bringing your debt down over time is an accomplishment, and it’s important to celebrate your wins along the way.

Resources for Getting Out of Debt

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If you’re struggling with debt and need some relief, here are some resources you may consider:

Credit Counseling Agencies

Credit counseling helps borrowers take control of their finances. A credit counselor can advise you on a wide range of financial issues, including money management, strategies for paying off debt, and budgeting. Nonprofit credit counseling agencies may offer free workshops and educational materials in addition to counseling sessions.

Debt Consolidation

You may explore debt consolidation loans and pay off multiple balances with a single loan. A personal loan for debt consolidation should ideally pay off other debts and not add to your debt load. So it’s a good idea to add up your current high-interest debts and borrow just that amount. A debt consolidation loan should, ideally, have a lower interest rate than the loans you’re combining to pay off.

Debt Refinancing

Debt refinancing — taking out a new loan to pay off preexisting debt — may be right for you if it reduces your interest rate. Refinancing student loans and auto refinancing may lower your monthly payment, but refinancing for a longer term may increase your total interest costs.Keep in mind if you refinance federal student loans with a private lender, you’ll lose access to federal IDR plans and the Public Service Loan Forgiveness program.

Debt Settlement

Debt settlement is an agreement between a debtor and creditor that may involve some amount of debt forgiveness. Debt settlement companies may be able to help reduce the amount of debt you owe.For a fee, a debt settlement company can negotiate with your creditors on your behalf. If successful, this strategy can help you avoid bankruptcy. Any debt forgiveness you receive in a debt settlement agreement may be subject to income taxes.

The Takeaway

The best way to pay off debt is to make budgeting decisions that are right for you. Taking steps to increase your income and reduce your nonessential expenses can help you pay off loan and credit card balances.If you’re looking to earn interest on your savings, Lantern by SoFi can help. Our online banking marketplace allows you to compare annual percentage yields (APYs) and choose an FDIC-insured bank account that’s right for you.Lantern makes it easy to compare high-yield savings rates.

Frequently Asked Questions

What is the average amount of personal debt?

Should high-interest debts be paid off first?

Is it better to pay off debt or save money?

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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