How to pay off debt fast with low income

WeMoney

The average debt for Australian young adults is $56,722; the average income is $1,344.70 per week. Those on a low income often face higher debts. While getting out of debt might seem impossible, there are several solutions.

Let's get to the following commonly asked questions:

  • What happens if you can't afford to pay your debt?
  • How do I pay off debt if I don't have enough money?
  • What is the quickest method to get out of debt?
  • What debt do you pay off first?
  • Is it smart to pay off all debt at once?

Q1. What happens if you can't afford to pay your debt?

Debt repayment is inevitable in life. Most people cannot afford a house, car, education, or pay medical bills without a loan. However, it may seem impossible to pay down your debt when on a low income. Try not to worry about money.

You might consider a debt management plan if you're facing financial hardship and cannot pay off your debt. You'll receive credit counselling, support, and perhaps a debt settlement plan with debt management. 

Before reaching that financial situation, try one of our simple tips to pay off loan debt with a low income.

Q2. How do I pay off debt if I don't have enough money?

Getting your debt under control and saving money while on a budget may mean more planning, but it's not impossible. Here are your debt relief options, from loan refinance to making extra payments. 

Assess your finances

Your first step is to understand your personal finance. While it's tempting to shy away from your bank account statements and credit reports when it doesn't look good, you must choose which debt to tackle first and how.

Use a pay-off calculator to determine how much extra cash you need to repay your home loan and other debt.

Make a budget 

Now you know how much money you have and how much you need to meet debt payments, create a budget. Use a budget app to calculate expenses, such as paying your bills, emergency fund and saving accounts deposits, and debt repayments. 

A budgeting app will help you stay on track and prevent further debt.

Important: If you have not yet done so, starting an emergency fund is vital in times of financial difficulty.

Cut expenses

If your budget seems a little tight, consider cutting unnecessary expenses. With a loan pay-off calculator, determine how much money you need to meet the minimum payments. 

If this leaves you struggling to pay for other necessities, consider how you might cut down expenses. For instance, cancel subscriptions you don't need.

Make extra repayments 

Paying extra money towards your monthly payments is easier said than done. However, if you find your budget allows, paying more than the minimum amount will help your debt pay off. Although, try not to use your saved money if you can help.

If you don't have any spare cash, consider how to increase your income. For instance, sell items you no longer use or need.

Note: Set up a direct debit from your checking account to ensure you always meet your monthly repayment deadline.

Refinance Debts 

If you're stuck paying high interest rates on your car loan, personal loan, or home loan, consider refinancing.

  • Lower mortgage and car or student loan refinance rates: switch mortgage lenders to improve your loan's rates.
  • Balance transfer credit card: get a credit card balance transfer to save money with rewards credit cards or cash back credit cards.
  • Consolidate debt: use a debt consolidation calculator to determine whether consolidation loans could offer some debt relief.

Stop taking on new debt

One of the worst ways to get trapped in a cycle of debt is to continue taking out loans. 

Stay clear of payday loans or a high-interest line of credit, often marketed towards low-income earners. However, they rarely help debt reduction.

Applying for a new loan while you have unpaid debt—for instance, an overdrawn credit card—could harm your credit score.

Note: If you need a personal loan to pay for something important, such as a medical bill, there are loans for bad credit.

Q3. What is the quickest method to get out of debt?

The best way to get rid of debts faster is to pay more than the minimum owed. However, you might consider debt consolidation loans or refinance to a lower interest rate to reach financial independence sooner.

Q4. What debt do you pay off first?

Two methods for repaying debt fast are the debt snowball method and the debt avalanche method.

Debt Snowball Method

The snowball method requires first paying off the smallest debt, such as credit card debt or student loans. Then, continue making the minimum payments to the larger debts, such as an auto loan or mortgage.

Debt Avalanche Method

The debt avalanche method means paying off the highest interest debt first. For example, home equity loan mortgage rates are typically lower than personal or car loans. Continue making regular repayments to all your debt but put extra cash towards your highest-interest loans.

Q5. Is it smart to pay off all debt at once?

It's best to pay off debt fast. While carrying a small balance might help improve your credit score, it can cost you a lot in interest repayments. If you struggle to meet repayments, you could file for bankruptcy (in a worst-case scenario).

On the other hand, if you repay your loans on time, you can begin saving money for retirement planning.

Consider your mortgage refinance or consolidation options to repay your debt all at once. Use loan calculators to determine how soon you can become debt-free.

In summary

If you're facing financial hardship and want to pay off debt faster, speak to a financial advisor. Repaying loans and credit cards may seem intimidating. However, the first step is acknowledging the problem and making extra payments.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

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