How to set up a debt repayment plan?

Multiple debts might feel overwhelming, but you don’t have to let them overcome you. Read on for debt advice to help you repay your debts.

Let’s get to the following commonly asked questions:

• Do you know all your debts?
• How do you pay all your debts?
• How to cut expenses?
• How to build savings while paying off debt?

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Q1. Do you know all your debts?

While it’s intimidating to look at your total amount of debt, you need to know what you owe, so create a list of everything to conduct a debt analysis of your finances. In your analysis, include the following types of debt:

• Auto loan.
• Buy now, pay later, credit.
• Credit card debt.
• Student loans.
• Home loan.
• Personal loan.

Once you’ve got all your debt information, you can start planning how to pay them off. 

Important: If you’re struggling to see a way forward, seek financial advice about your debt repayments.

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Q2. How do you pay all your debts?

Too many credit loans are bad for your mental health, and if you’re struggling to pay, you need to prioritise your debts. That said here are some handy debt solutions tips.

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Start with the highest interest

The debt avalanche strategy prioritises the highest interest credit first. To get your debt under control, maintain the minimum payments on all your loans. Then, if you can, put extra payments towards the highest interest rate each month to reduce your interest payments.

For example, if car loan interest is higher than your home equity mortgage rates, pay off your car loan first. Seek financial assistance with avalanche debt strategies.

Note: Unsecured debt tends to have higher interest rates. 

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Start with the most minor debts first

Alternatively, you might consider the debt snowball method. Continue making minimum monthly payments to all your loans, putting whatever extra you can afford to pay towards your smallest debt. For example, car loans are typically smaller than home loans, so you would first aim to pay off debt on your car.

If you cannot keep on top of your debt payments, you can request a consumer lease or payday loans for a smaller payment due. Talk to financial advisers before making these kinds of financial decisions.

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Consolidate your debts

Another solution is to take out a consolidated loan. Debt consolidation loans roll all your debts into one debt pay-off plan, offering some debt relief. Alternatively, you could also apply for a balance transfer credit card.

Important: Only apply for one loan at a time. Do not apply for multiple loans at once, as this can negatively affect your credit score.

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Debt management plan (DMP)

Debt management companies will help you create payment plans to avoid dealing with debt collectors. If you think you need help managing debt, seek credit counselling to make a debt payment plan.

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Q3. How to cut expenses?

While you’re in pay-off mode, you want to prevent yourself from incurring further debts.

• Figure out your expenses — are there any unnecessary costs?
• Housing, transportation, and food are the main expenses most face. Can you make significant savings by walking to the shops or foregoing the meal out?
• Freeze your credit cards, so you only spend money you physically have in your account.
• Contact your insurance providers to reduce premiums.

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Q4. How to build savings while paying off debt?

It can be challenging to save money while paying off debts, but you need an emergency fund to prepare for financial hardship.

Saving accounts will help improve your chances of future credit approval. For example, if you have a bad credit score, many lenders might take your savings buffer as evidence of your reliability instead.

Create a budget with all your living expenses, including your rent, mobile phone bill and income tax, to begin saving money. If you have any extra money, put it towards your savings for emergency or retirement planning.

Check the fixed-term deposit rates of your savings account. Shop around, and see if you can find a better deal that pays you a higher interest rate on your savings.

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Your debt repayment plan could include the following: 

• Mortgage refinancing for a lower interest rate.
• Negotiate fees with mortgage lenders.
• Take out a reverse mortgage.
• Take advantage of government programs like the Service NSW app vouchers.
• Pay for small purchases using a debit card, not credit.
• Cancel unnecessary subscriptions (eg. Netflix, Stan, or Binge).

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Important: If you require additional help, visit ASIC’s MoneySmart website to find free advice. You can also call the National Debt Helpline on 1800 007 007 to get confidential free advice from financial counsellors.

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In summary

Start with a debt repayment plan and pay your debts back as soon as possible. While it might seem overwhelming, paying the minimum amount each month will prevent late or missed payment fees. Finally, remember that plenty of services like the National Debt Line are just a phone call away.

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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.