5 steps to get out of debt

5 steps to get out of debt

While a certain level of carefully-managed debt can help us make progress towards our financial goals, it’s easy for debts, fees and interest charges to grow larger than we can easily manage.

If you’re struggling with debt and don’t know where to start when it comes to getting your finances back under control, here are five steps you can potentially follow:

Step 1 – Get organised and make a plan

There are several questions you should ask yourself when making a plan to get out of debt:

  • What debts do you owe?
  • Who do you owe them to?
  • How do you owe on each debt?
  • How much are the monthly repayments?
  • What are their interest rates?
  • What are their due dates?

Once you have a better idea of your overall debt situation, you can prioritise which debts to focus on clearing first.

Step 2 – Focus on your smallest debts OR your debts with the highest interest rates

Trying to pay off multiple debts at once can prove both difficult and expensive. Depending on your financial situation, you may want to consider focusing on paying off one debt at a time, and only paying the minimum amount required to service your other debts. The question is, which debt should you concentrate on clearing first?  

One possible strategy is to put the lion’s share of your available budget towards clearing the debts with the smallest balances owing first. These relatively easy wins let you make clear progress towards your goal of becoming debt-free, and give you a valuable psychological boost that encourages you to stick to your commitment.  Also, every debt you fully clear is one payment to budget for, and one less set of fees and interest charges. The funds that once went towards servicing these small debts can then be put towards tackling your bigger, nastier debts.

A second possible strategy is to focus on paying back whichever of your debts has the highest interest rate. The longer you take to repay any loan, the more repayments you’ll have to make, and every repayment means another interest charge. By prioritising clearing your high-interest debts first, you may save more money in interest charges in the long run than paying off your smaller debts first. 

The ideal strategy for clearing your debts will depend on your situation, as well as your household’s personal finances. Make some calculations and use your best judgement to make a plan, and be prepared to stick to it.

Step 3 – Talk to your creditors

Nobody wants to see a borrower default on their loan, including the lender. If you’re struggling to afford your repayments, it may be worth talking to your creditors and being upfront about your current situation, rather than risking missed repayments that could leave you in serious financial strife.

Your lender may be willing to make some concessions to help you manage your debt situation, such as offering a repayment holiday or allowing you to refinance onto a more affordable interest rate.

However, your lender will need you to pay back what you owe sooner or later. If you are offered some debt relief, don’t use it as an excuse to relax and rest on your laurels, but refocus on clearing your balance owing as quickly and efficiently as possible.

Step 4 – Consider debt consolidation

If you owe money to multiple creditors, it’s worth considering whether consolidating your many smaller debts into one larger debt will leave you in a better financial position.

A debt consolidation loan is a type of personal loan where you borrow a lump sum of money that is used to fully pay off and clear your other existing debts. This leaves you with just one loan to manage, with one repayment each month, one interest charge at the one rate, and one set of fees to pay. This can greatly simplify your household budgeting, and potentially make your monthly repayments more affordable.

It’s important to note that a debt consolidation loan could ultimately cost you more in total interest than paying off your debts separately. This is because debt consolidation loans often stretch out your repayments over a term of 12 months or more. While you’ll make a larger number of smaller repayments, you’ll be charged interest on each of these repayments. In some cases, you may pay less in total interest by clearing your debts separately over a shorter period of time, even if the repayments are less immediately affordable.   

It’s also important to note that once you’ve cleared your old debts with the help of a debt consolidation loan, that doesn’t mean you can go out and run up new debts! Resist the temptation to go shopping with your now-cleared credit cards, and focus on your mission to become debt-free.

Step 5 – Get help when you need it

Getting out of debt isn’t easy or fun. It’s hard work, and can be a real struggle for borrowers in financial hardship.

Don’t be afraid to ask for help from professionals, such as accountants and financial advisers. If you don’t think you could afford their fees, the Australian government has free financial counselling services available, along with their National Debt Helpline – 1800 007 007.

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Learn more about personal loans

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

What are the pros and cons of debt consolidation?

In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay an existing $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 20 per cent.

However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Is it hard to improve your credit score?

It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.

As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

Can I apply for a quick loan online?

While some lenders will require you to provide paperwork in person, many lenders will allow you to make an application for quick personal loan online. You’ll still need to provide information on your identity, income, and loan purpose in most cases.

Can I get a fast loan if I’m unemployed or on Centrelink?

Even if a lender has no credit checks, they will usually still need to confirm you can afford to repay a fast loan on your income before they’ll approve your application.

If 50% or more of your income comes from Centrelink payments, you may find it more difficult to have a fast loan application approved. Consider checking with the lender before applying to confirm if they lend to people on Centrelink.

Can I get a $4000 personal loan if I’m unemployed or on Centrelink?

Before most providers of personal loans or medium amount loans will approve an application, they’ll want to know you can afford the loan’s repayments on your current income without ending up in financial stress. Several lenders don’t count Centrelink benefits when assessing a borrower’s income for this purpose, so these borrowers may find it more difficult to be approved for a loan.

If you’re unemployed, self-employed, or if more than 50% of your income come from Centrelink, consider contacting a potential lender before applying to find out whether they accept borrowers on Centrelink.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Are there $2000 emergency loans?

If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.

For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.

For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007

What do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.