How to manage and pay off debt

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If you have taken out a personal loan or credit card and cannot keep up with the monthly repayments, the debt can quickly mount up and become hard to deal with. To prevent things getting worse, there are steps you can take to get on top of those debts. In this article, we take you through some ideas for paying off debt and improving your financial situation.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

When it comes to working out how to get out of debt, it can be tempting to put it off until ‘tomorrow’. But that can make things worse, especially if you have a lot of interest building up. If you’ve been pushing debt to the back of your mind for a while, it might feel hard to know where to start.

As a first step to clearing debt, you could get everything out in front of you. Take a pen and paper and start listing what you owe. Write down each debt, how much you owe, the interest rate, and any payment dates or minimum payments. Now that you have all the numbers, you can start working on a strategy to pay off debt.

Different types of debt will suit different repayment methods. That’s why it can help to know which ones you have. Most debts come under one of two categories: secured and unsecured debt.

Secured debt:

This type of debt uses property or valuable assets as collateral. This means that, if you are unable to repay a loan, the lender can take ownership of that asset to recover the money owing to them. Examples of secured debt include:

• Mortgage, which is a loan taken out to buy a home.
• Car loan, for financing the purchase of a new vehicle.
• Student loan, which can be used to pay for students’ higher education, living expenses, or other costs.

Unsecured debt:

Unlike secured debt, unsecured debt isn’t backed by assets, so lenders rely on your ability to repay. Because of this, the interest rates can be slightly higher.

Examples include:

• Credit card debt: A revolving line of credit you can borrow against (up to a certain limit) and pay back.
• Personal loans: These can be taken out for any purpose, such as a renovation project on your home or an emergency expense.
• Overdrafts: You can open a bank account with an overdraft that allows you to borrow more money than you have in your account.
• Payday loans: These are often used in an emergency, and they come with very high interest rates.

Debt can be further classed as either problem debt or managed debt. You might have problem debt when the payments are higher than your income, and you’re finding it difficult to keep up with repayments. As a result, you might have feelings of stress and worry about potential insolvency.

Debt isn’t always problematic, however. Managed debt refers to debts you can afford to repay, like regular mortgage or loan payments. You can recognise this type by your ability to easily cover the costs within your existing income.

Now you have an overview of what types of debt you’re dealing with, you can choose a debt plan. In some cases, simply creating a budget is enough to open your eyes to your current situation and see how to get out of debt. Other situations may require more drastic measures.

If you don’t already have one, making a budget can be one of the most effective ways to incorporate debt repayments into your monthly finances and clear debt. Take a look at your income, including your salary and any savings, and your regular monthly bills. You then track what you’re spending each month, and try to find ways to cut back on non-essentials.

If you’re wondering how to clear debt quickly, you might question whether budgeting alone is enough. Taking credit card debt as an example, your budget can help you identify ways to pay more than the minimum payment. Because the more you can put towards that debt each month, the less interest you’ll end up paying and the faster you’ll be able to pay it down.

If you don’t have much disposable income, one option to tackle debt is to try increasing your monthly income. You might consider picking up a side job like babysitting or dog walking. If you are trained in a particular skill, freelancing is another way to earn extra cash.

You could also sell items you no longer need online to bring in some extra money. If it feels like it would take years to pay off at your current pace, you might want to consider more drastic measures, like selling a valuable asset such as your car. This could significantly reduce your debt in a short amount of time.

Read our ultimate guide on how to save money to get some more ideas.

If your main concern is credit card debt, you’re not alone. In fact, many people in Ireland are paying more interest than they need to*. To start tackling debt from credit cards, you might try asking your card provider for a lower interest rate. You can also try contacting them with a letter explaining your current financial situation and requesting a new debt plan that’s easier to manage. It can sometimes help to use free debt help services to do this.

In some cases, it might make sense to look for a 0% interest balance transfer card. You can then move your debt to this new card without having to pay interest for a set period. This might be helpful if you’re confident you can pay off most of your balance before the interest-free period ends. Just keep in mind that the rates might shoot up after that introductory period. You’d also have to check if there are any transfer fees.

If you’re struggling to know how to get out of debt, a good strategy can make all the difference. Two popular strategies for paying debt are the avalanche and snowball methods:

• Avalanche method – This is where you tackle debt with the highest interest rate first. You can refer to your list of debts and put them in order from highest to lowest interest rate. You then make the minimum payment on each and put any extra money towards the debt with the highest interest. The avalanche method can be an effective way to save on interest and pay debts back more quickly.
• Snowball method – Crossing your debts off the list can be highly motivating. With the snowball method, you deal with debts with the smallest balance first, while making minimum payments on the others. Once the smallest debt is gone, you move on to the next smallest, using the money you saved from the paid-off debt. Some people get a boost from building that momentum and eliminating debts one by one.

It might sound counter-intuitive, but consolidating debt by taking out a new loan can actually help you manage payments more easily. Particularly if you have multiple debts and can get a loan you can afford, a consolidation loan could be a suitable option for clearing debt.

The way it works is you take out a larger loan to pay off your existing debts, leaving you with just one payment to make. This new loan may be secured with your home or another property. The loan term could be longer, but it could make keeping track of your payments simpler.

Both are equally important, but focusing on paying down high-interest debt first may be more beneficial. This is because the interest on high-interest debts is usually higher than what you can earn from savings accounts, so tackling that debt first can save you more money in the long run.

Once you’ve got your high-interest debts under control, there’s no harm in shopping around to see if a savings account can offer rates that exceed the interest on your remaining debt. Fixed term deposits usually offer higher interest rates, but come with restrictions on withdrawals. If you prefer flexibility, a demand deposit savings account allows you to withdraw funds as needed, though it may offer a lower interest rate.

If you’ve tried everything to deal with debt problems but still can’t seem to make progress, it may be time to consider formal options under insolvency law. This is especially applicable if you’re struggling to make any payments on your debt, and things aren’t likely to improve any time soon. 

In Ireland, there are four main options for this route:

• Debt relief notice (DRN) – This option is for people with low income or few assets who are struggling to pay off debts that are unsecured, including credit cards. If your debts total up to €35,000, a DRN may be suitable. Once granted, creditors can’t contact you about repayments. The arrangement lasts for three years, and at the end of it, your debts are wiped out.

• Debt settlement arrangement (DSA) – If you can’t see a way to pay off debts in the next five years, a DSA could be an option. A Personal Insolvency Practitioner will help you come up with a repayment plan, and you’ll make regular payments to your creditors through them. Creditors can’t take legal action during the process, which usually lasts five to six years. At the end of the term, any remaining unsecured debt is written off.

• Personal insolvency arrangement (PIA) – This option is for people who have both secured debt (for example, a mortgage) and unsecured debts they can’t pay off. It applies to debts up to €3 million. A PIA typically lasts up to six years, and you’ll work with your creditors to restructure your debts. If you’re able to make some payments, this could be a suitable option to reduce your unsecured debt and restructure your mortgage.

• Bankruptcy – This is generally considered a last-resort option if you’re unable to pay debts of over €20,000 and the other three insolvency solutions are unsuitable. It involves a court process where an Official Assignee takes control of your assets, which will be sold to pay off your debts. After about a year, most of your remaining debts will be written off, and you’ll be discharged from bankruptcy.

It can be hard to know how to get out of debt, but you don’t have to face it alone. There are a variety of free resources to help with debt. 

The Insolvency Service of Ireland is an independent government body that provides services for dealing with debt. They offer a range of debt solutions and can put you in touch with a financial adviser. Learn more here.

The Money Advice and Budgeting Service (MABS) is another free service offering support and advice for tackling debt, including legal options. Find out more here.

Knowing how to get out of debt is the first step. You’ve worked hard to get some financial breathing room, and now you can make your money work for you. One way to do that is by comparing savings accounts to find the best rates.

If you’re ready to start, opening a savings account is quick and easy. Simply register for a free Raisin Account, log in, and apply today. With Raisin Bank, you’ll gain access to competitive interest rates from a variety of banks and building societies.

*https://www.independent.ie/business/personal-finance/up-to-400000-paying-high-legacy-credit-card-rates-but-they-could-make-big-savings-says-central-bank/a889887921.html