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If you want to get rid of debt, two of the fastest options include making extra payments toward your multiple debts, or — if you want the convenience of a single payment — getting a debt consolidation loan. Here’s what each method does and how you can figure out which will work best for you.
The right way to make extra payments
Paying off debt fast by making extra payments means you might make more frequent payments (twice or more each month) or pay a larger sum each due date.
Having a payoff strategy can keep you focused and boost your success. Two methods we recommend are debt avalanche or debt snowball.
The debt avalanche method involves paying off the debts with the highest interest rates first — they’re the costliest loans — then using the money you were putting toward those debts to pay off your smaller ones. This method helps you save the most money, and when you apply extra payments, you’ll pay off the debt sooner.
You could instead try the debt snowball method — making extra payments to pay off your smallest debts first, then rolling the money you used to pay off the small debts toward the bigger ones. This system is more immediately gratifying than the debt avalanche method, and the extra payments will get you to your last payment more quickly.
» MORE: How to pay off debt fast: 7 tips
Use this calculator to find out how much faster you can pay off your debt.
How debt consolidation pays off debt fast
Debt consolidation combines multiple debts into a single, lower-interest payment. It’s a strategy that works best if you have multiple debts with different interest rates, payment amounts and due dates.
» COMPARE: Debt consolidation loans
You can only reap the benefits of debt consolidation if you qualify for a rate that’s lower than the combined rate on your current debts. You’ll need good or excellent credit to qualify for the best interest rates — a FICO score of 690 or higher.
A lower interest rate means you can worry less about keeping interest at bay on multiple accounts and put more money toward reducing the overall debt.
You can only reap the benefits of debt consolidation if you qualify for a rate that’s lower than the combined rate on your current debts.”
It also helps you pay off your debt faster. For example, say you’re paying a total of $220 each month toward two credit cards: You have $3,000 of credit card debt at 21% APR on one card and $5,000 at 19% APR on another card. At this rate you will be debt-free in just under five years.
But if you have excellent credit and can get a debt consolidation loan with an APR of 14%, you can pay off your total balance in three years. Your new monthly payment will be about $50 more, but you’ll save almost $2,500 in total interest.
» CALCULATE: Your new monthly payment with a consolidation loan
Consolidation is not a good option if your debt total is overwhelming or unmanageable. It works best for those who can qualify for a lower interest rate; have consistent cash flow; and whose total debt (excluding mortgage) doesn’t equal more than 40% of their gross income.
How you can consolidate your debt
The credit card enables you to transfer all of your balances onto one card and pay no interest during a promotional period, which is usually between 12 and 18 months. Sticking to this payoff period will help you pay off the debt faster.
With a debt consolidation loan, you or your lender use the loan amount to pay off your multiple debts at once. You then repay the loan monthly over a set period of time, usually two to five years.
Keep in mind that debt consolidation only works if you make a plan to limit taking on additional debt. You may not be able to completely stop using credit cards, but at least try to keep your balances low.
Once your old debts are paid off and you have just one payment to make, try to tack on extra payments when you can to get rid of it faster. Prepayment penalties on personal loans are rare, but check with your lender to find out.