How to escape the debt trap

How to escape the debt trap

If you are one of many Australians struggling with debt there is no better time than now to take action with simple strategies to help clean the slate.

If your personal debt levels are creeping up, you’re not alone – many Australians continue to battle mounting debt.

Latest research shows that at present Australians owe around $32.3 billion on our credit cards combined. On average, each card holder has a personal debt of over $4,000. On top of this, national personal finance commitments are currently at $7.18 billion as at the end of 2015.

Help is at hand

If you are battling ballooning debts, it is important to realise that help is available. A sensible first step is to speak to your creditors before skipping a bill or mortgage repayment altogether. You may be able to negotiate a manageable repayment plan – one that fits your budget. Avoid taking on fresh debt to pay off what you already owe as this could be the start of an escalating debt spiral.

Make sure you are getting help from the right places by avoiding payday lenders offering a quick fix. Instead, contact a free financial counsellor, such as the one provided by ASIC, or contact a specific debt advice hotline in your state.

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Consider bundling multiple debts into one

Consolidating multiple high interest debts into a low rate personal loan could make your debt more manageable while providing fixed repayments that are easier to budget for. Be aware this strategy will only work if you resist the urge to take on fresh debt, including reloading your credit card with new purchases.

Refinancing a credit card debt into a personal loan may be a more affordable option too. The average advertised credit card interest rate is around 17 per cent, while RateCity data shows unsecured personal loan interest rates below 10 percent.

Take the knife to card costs

If your credit card debt is creeping up on you, it’s worth looking at ways to get the balance back under control.

The golden rule here is to pay as much as possible off the card and stop using it for new purchases. Remember that by paying only the minimum repayment amount on your card debt can extend the length of your debt by decades and increase the amount of interest payed by thousands.

The majority of credit cards require only a 2 percent minimum monthly payment. Making repayments at this rate – and based on the average interest rate charged – it would take 29 years and 8 months to clear a $5,000 balance and cost a whopping $15,300 including interest. Increasing your repayments to just 3 percent of the outstanding balance can halve the time it takes to pay off the debt.

A low rate balance transfer deal may help you get ahead with your card though be sure to choose the offer that matches your budget and be sure to read the terms and conditions for the card before deciding whether it’s the best option for you. There is not much point opting for a card charging 0 percent for 6 months if you really need 12 months to make a serious dent in the balance.

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Learn more about personal loans

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.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

What are the pros and cons of personal loans?

The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.

One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

Can I get a no credit check personal loan?

Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

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.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Are there low doc personal loans?

Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.

It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Will comprehensive credit reporting change my credit score?

Comprehensive credit reporting may change your credit score, either positively or negatively, depending on an individual's situation.

Under comprehensive credit reporting, credit providers will share more information, both positive and negative, about how you and other Australians manage credit products. That means credit reporting bureaus will be able to make a more thorough assessment of everyone’s credit behaviour. That will lead to higher scores for some consumers and lower scores for others.