Dealing with debt is something no one wants to think about, though the stark reality is that most people will enter some form of debt during their lifetime. While total levels of household debt have shown tentative signs of improvement in Australia, it is still a prevalent issue for many.
Getting out of debt is also a problem that can quickly exacerbate if you allow things to spiral. Without a careful debt management plan and consistent monthly payments, debt will not go away. And if you bury your head in the sand and pretend it will vanish on your own, you may quickly find yourself in a dangerous financial situation.
Fortunately, there is always a route to debt repayment and a more comfortable level of financial freedom. Using the following steps and strategies, you can pay off your debts faster and leave yourself with a little extra cash at the end of the month.
Let’s get to the following commonly asked questions:
Debt occurs when an individual borrows money from a financial institution or creditor. There are several reasons a person may enter into some debt.
Sometimes these reasons are positive. For example, a person or couple taking out a mortgage or home loan, property investment, or arranging a business loan knowingly enters into debt but will likely improve their long-term financial prospects. Likewise, student loans are a form of debt but may lead to increased employment prospects.
However, sometimes debt is caused by poor spending habits. Credit card debt, car loans, consumer credit, and personal finance borrowing used for frivolous purposes will lead to an immediate feeling of contentment, but it all needs to be settled. Unfavourable loan rates can quickly accelerate what you are expected to pay back.
Additionally, debt can arise through unexpected circumstances or unfortunate life events. For example, injuries or job loss might affect cash flows, resulting in less income. This can make paying your bills much harder and have a knock-on effect on your ability to pay down debt.
Debt consolidation loans can reduce your monthly debt payments, particularly if you have several smaller debt commitments to manage simultaneously.
Many people consolidate debt by taking out a single personal loan to repay all existing debt commitments. As a result, they will only have to concentrate on a single repayment each month.
Not only is this much easier to keep track of, but it can also eliminate the high-interest amounts that were accumulating from the other commitments.
If you are looking for consolidation options when tackling your debt agreements, check out our loan calculator to find the best deal for your circumstances.
Essentially, debt refinancing is a form of consolidation. It is used to secure a new loan with more favourable terms regarding interest rates or minimum payment amounts. This is usually an option if you have a strong credit score.
Mortgage refinancing is a standard option for many. However, as it is a long-term commitment, improved refinance rates may develop and become available to the homeowner. Alternatively, you can arrange a home equity loan as part of your refinancing, which can then be used for home improvements.
Note: Debt refinancing should not be confused with debt restructuring. If you are advised to restructure a loan, you are no longer in a position to make repayments. Amendments will need to be made to an existing loan, and there will be no option to take out additional finance.
The debt snowball and avalanche methods are two additional forms of debt settlement that might appeal to some people.
With the debt snowball method, you will list your existing debt commitments. You will continue to pay the minimum amount on all debts except for your most minor commitment, which you will attempt to pay off as quickly as possible using any extra money you can afford to spare.
With the avalanche method, you will instead attempt to pay off your most significant debt first.
There are pros and cons to both methods. The snowball method will reward you with small psychology wins whenever you clear debt, but the high-interest rates on the larger commitments will remain in place. Conversely, you will pay less interest with the avalanche method, but it will take longer to see any tangible results and settlements.
A credit card balance transfer allows you to merge all your cards into one, transferring your debt from an existing institution to a different one. The new institution will often entice a deal with special rates for a limited period. For example, a balance transfer may result in no interest needing to be paid for six months, meaning that, in theory, you can pay off the debt faster.
A balance transfer makes it easier to track your spending and allows you to choose a lower interest rate so you can pay off your credit card balance faster.
However, there are things to consider before committing to a balance transfer. Some institutions will implement balance transfer fees to facilitate the transfer, which can be quite hefty, particularly for larger transfers.
You will also need to know the rates once the welcome period expires, as these may sometimes be better than your existing rates.
Becoming completely debt free is something many people aspire to. Debt payoff is a valid goal, particularly if the debt you have been dealing with will lead you to a stronger financial position.
It’s important you keep track of your financial accounts, avoid bad credit, have an emergency fund savings account, and understand the different types of debt. Knowledge is the key to avoiding the debt collector.
However, as with most things, it will take an element of self-discipline and patience to succeed. There may be times when you will need to be spending less money on luxury purchases to commit more cash to pay off debt. This may not be pleasant, but it will be worth it if it leads to a debt-free life sooner rather than later.
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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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