Struggling to Repay a Loan? Here's How to Create a Debt Repayment Plan

Loan repayment can be a long and overwhelming process. And if you want to avoid default and protect your credit ratings, you need to develop a strategy to make servicing loans more manageable. 

You need a debt repayment plan.

A repayment plan allows you to create a "get-out-of-debt strategy" tailored to your needs and financial situation. It will allow you to pay down your debt faster and can help you get a head start on your goals, whether that is reducing your debt-to-income ratio to improve your cash flow or starting your journey to being debt-free.

However, turning around your financial situation and getting your debt under control doesn't just happen. It requires planning, commitment, and strong self-discipline. While it might be daunting initially, it gets easier over time as you improve your spending habits and settle into your plan.

This article will explore what a debt repayment plan entails and how to create one to make your debts more manageable.

Read Also: The 3 Laws of Money Management

What is Debt Repayment Plan?

A debt repayment plan is a strategic approach you build to pay off your outstanding debts. Its main advantage is that it allows you to gradually eliminate your debts and gain better control over your financial situation. It'll also help you reduce interest charges, lower debt stress, and prevent default.

A debt repayment plan helps you create a structure to reduce your debt burden. Therefore, it will typically require that you take specific steps to ensure you achieve that, depending on your financial situation and preferences. 

For instance, if you have bad spending habits, you will need to lower your monthly bills, or if you are underearning and the rise in interest rates has increased your repayments, you will need to increase your income. The end goal is whatever action you take will help you pay down your debt. 

Step-by-Step Guide to Creating a Debt Repayment Plan

Juggling loan repayments with other financial responsibilities can be a significant challenge. It demands financial discipline to meet repayment obligations while prioritizing other important goals, like saving money. 

Therefore, aligning your debt repayment plan with your overall financial situation and money management strategy is crucial to strike the right balance. This will ensure you can work towards paying off your debts while progressing towards other financial objectives.

Here's how you can achieve that

Account for All Your Debts

Before you can eliminate your debt, you'll need to list all your debts to know what needs to be repaid. This includes all personal loans, credit and digital loans, auto loans, and any HELB loan you are repaying.

Once you have accounted for all of them, you need to write them down in an organized way. Consider grouping all of your debts together in one place to visualize the course of action you will need to take.

To complete this step, create a table in a spreadsheet program or write it out with four columns and label them with the following titles:

1. Debt Name
2. Minimum Monthly Payment
3. Total Balance
4. Interest Rate

This will help you accurately total up the balance, know the cost of your debt, and figure out the minimum monthly payment you need. This will go a long way in helping you figure out how much you need to put toward debt repayment, what actions to take to lower your burden, and what debt management strategy to follow.

Read Also: The 10 Unhealthy Debt Practices You Should Avoid 

Create a Budget That Accounts For Debt Repayment

A budget gives you a clear picture of your income, expenses, and overall financial situation. It lets you see how much money you can allocate towards debt repayment after covering essential expenses like rent, utilities, groceries, and other bills. This will allow you to fund your lifestyle and repay your loans without straining yourself financially.

When creating your loan repayment plan, the first step is to make room for debt repayment in your budget. This ensures you prioritize debt servicing like your water or electricity bill.

Creating a budget that accounts for your debts ensures that a certain amount of your income will be directed to repay your loans. It will also allow you to plan your spending so that you don't run out of money and are forced to borrow more. 

Finally, a budget allows you to set realistic and achievable debt repayment goals. You'll be able to determine how much extra money you can allocate to paying off debts each month, which helps create a practical timeline to achieve your goal of lowering your loan burden.

Read Also: How the 70/20/10 Budget Rule Can Help You Save & Crush Debt 

Cut Your Expenses to Reduce Debt Burden and Increase Your Income

Once you have a budget showing how much money you need to put toward paying off your debt, you need to set a repayment goal. For example, "I will diligently repay my Ksh300k debt in three years by making consistent monthly repayments of Ksh9,000."

Knowing how much money you can contribute towards monthly debt repayment will allow you to estimate how long it will take to get out of debt and keep you motivated throughout that process. 

But what if your income doesn't support your goal? In that case, you will need to do either (or both) of two things. 

First, you can consider cutting your expenses by making major budget adjustments, such as eliminating discretionary spending or moving to a cheaper apartment. Second, you can explore ways to increase your income, such as taking freelance gigs or monetising your skills. Both strategies will give you disposable money you can direct to debt repayment. 

Read Also: 7 Places You Can Find Money to Save Every Month

Decide on a Your Repayment Strategy 

Debt can be burdensome, but various approaches can alleviate that weight depending on your chosen debt management method. These strategies are not universally applicable; the best method for debt repayment depends on your total outstanding debt, the type of debt you carry, and your personal preferences.

There are three approaches to managing your debt repayments.  

The Avalanche Method: This strategy first focuses on prioritizing high-interest loans by paying them off first. It can save you money in the long run by reducing the amount of interest you pay. You will need to pay the minimum repayment on each of your debts and direct any extra repayments on the high-interest loans.

The Debt Consolidation Method: This strategy involves taking out a large loan to pay off all other debts, i.e., consolidating them into one payment. It allows you to simplify repayments, lower the overall interest rate and potentially reduce the total interest paid over time.

The Snowball Method: This debt reduction strategy focuses on paying off smaller debts first while making the minimum payments on larger debts. Once the smaller debts are paid off, the payments that were going toward the smaller ones are applied to the larger ones, creating a snowball effect.

Read Also: Break the Cycle: 7 Simple Ways to Dig Your Way Out of Debt

Automate Repayments

Now that you know which debts you want to pay in what order, it's time to put the repayment plan on autopilot. 

Automating your debt repayments can have far-reaching benefits, from ensuring you achieve your goals to improving your credit score. First, it ensures regular and timely payments, reducing the risk of missed deadlines and late fees. Second, it simplifies the process; and finally, your timely repayments can positively impact credit history, potentially boosting credit scores over time.

You can implement automatic debt repayments using these strategies:

1. Voluntary Salary Garnishment: Deducting debt payments directly from your paycheck by your employer, ensuring consistent repayments without active involvement.
2. Bank Standing Orders: Setting up automatic transfers from your bank account to creditors on specific dates, maintaining regular payments.
3. Digital Financial Tools: Leveraging automation features provided by banks, microfinance institutions, or SACCOs to schedule and process debt repayments automatically.

Read Also: 5 Practical Ways to Stay Motivated When Paying Off Debt

Get an Accountability Partner

Getting out of debt and sticking to a repayment plan isn't as easy as it sounds. It can be even more complicated when you have a debt problem. And that's why you need to consider getting someone who can push you and, importantly, hold you accountable throughout your debt-free journey. Their job will be to support and encourage you through the ups and downs and remind you when you deviate from the path you set for yourself.

Two examples of suitable accountability partners are close friends and financial advisors. 

A close friend who understands your financial goals can provide emotional support and be a sounding board. They can offer honest feedback and motivate you to stay on track during challenging and triumphant moments. 

On the other hand, a financial advisor possesses expertise in managing debts and can provide professional guidance. They can offer personalized strategies, review your progress, and help you make informed decisions, ensuring you stay focused on your debt-free journey.

Read Also: 5 Types of Friends We All Need

Constantly Monitor Progress To Stay on Track

When you have a financial goal, like repaying your debts within a specific timeframe, you need to track your progress to see how you're doing. Witnessing the debt decrease with each payment can motivate you to keep going.

Tracking your progress can also ensure you stay on track and adjust as needed. If the debt reduction isn't as significant as desired, you can take proactive steps to change your repayment plan and return to the right track. 

Monitoring the amount you pay off will allow you to assess the efficiency of your debt repayment strategy and make necessary improvements. Finally, tracking your progress can give you a sense of accomplishment. It can be great when you hit milestones or achieve your goal.

Read Also: 8 Easy Ways to Pay Off Your Debt Faster

WRAPPING UP

Executing a debt repayment plan can be daunting. But you can make it a breeze by staying in touch with your lenders as you manage your debt repayment plan. This ensures they know your efforts and may offer assistance or flexibility you might need. Second, avoid taking on more debt and focus on paying off existing obligations to avoid getting yourself into a debt cycle.

Once your plan materialises and your debt is under control, adopt better financial habits so you don't find yourself in the same predicament again. You can stay out of debt by sticking to your budget, building your emergency savings, and working on increasing your income.