If you've borrowed money, you're in debt.
You might not think of yourself as a person with debts. But if you have a mortgage, if you have an outstanding balance on your credit card or you've just bought a new television on interest-free terms, you're in debt.
There's nothing wrong with debts, so long as you can afford to pay them back.
Are your debts out of control? Do you have to put off paying bills you can't afford? Are late fees and interest payments eating up your money?
Don't despair if your debts are getting on top of you. A few basic steps can help you simplify your finances, cut your interest bills and take control of your money.
And if you've got debts you really can't repay and you're worried about debt collectors and legal action, it pays to know your rights and responsibilities and where to get help.
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The bottom line
- Don't panic. There are things you can do to get your debts under control.
- Help is available from financial counsellors and other free advisory services.
- Don't ignore your debts. You will end up in a worse position if you do nothing.
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Debt problems
Debt is a fact of life for many Australians. A lot of people borrow money at one time or another for things like cars and houses. But from time to time, debts can become a burden and, for some, debt can result in significant financial hardship.
It can be quite easy to get credit but you can have problems if you take on too many debts. Borrow too much money at once and you can feel the pinch when it comes to paying interest. Some people can end up trying to juggle two or three credit cards, a store card, a personal loan and a mortgage. If you’re in that position, it can be all too easy to miss a payment or two and have to pay even more interest.
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Make it happen
- Be careful not to miss a payment deadline if you buy something on interest-free or no-repayment terms.
- If you are late with your repayments, you will be charged interest which can be much higher than other forms of credit.
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If you lose control of your debts, you can lose control of your money. The interest and repayments can build up to the point where it can be hard to afford other things. Don’t give in to the temptation to buy something else on credit if you’re in this position. It will only make things worse.
The worst position to be in is when you can’t afford to repay a debt. This can happen to people with lots of loans if their circumstances change unexpectedly. Your income can take a dive after something like a sudden health crisis, a divorce, or losing your job. If you’ve got lots of debts to repay, you can suddenly find yourself dealing with demand notices and collection agencies. In some cases, your goods can be repossessed and you can be sued.
Take control
If your debts have grown so large that they dominate your life, it’s time to take control. Don’t ignore debt problems and hope they will go away. If you ignore them, they will get worse.
- Don’t take out any more loans and don’t let impulse shopping drive up your credit card debt any higher.
- Don’t accept offers to increase your credit limit without first working out if you can afford more debt.
- Try getting into the habit of paying for things with cash rather than credit. You will not only stop your debt growing, you can save money in interest and fees.
- Think about increasing your repayments. This will drive down your debt faster and it will also save you interest.
- Think about paying more than the minimum monthly payment off your credit card.
- Talk to your lender about increasing the monthly payments on your personal loan.
- If you get a windfall, think about paying off a personal loan or making a one-off payment on your mortgage.
- Try to cut down your expenses.
- Think about whether you can increase your income. This might mean you or a family member taking a second job until your debts are under control.
- Try doing a budget. This will help you understand where your money goes so you can plan how to repay your debts. See Budgeting.
Dealing with multiple debts
If you have more than one loan, try to make extra payments on the ones with the highest interest. They may cost you more money in the long-run so it makes sense to pay them off first.
It may be worth consolidating multiple loans. You do this by taking out a new loan which you use to pay off the others. You can save money doing this if the interest and fees on the new loan are less than the interest and fees on your old loans.
Consolidation loans can look very attractive to people faced with a lot of debts. But it is important to do your homework and read the fine print to make sure consolidation really will save you money in the long run. Don’t just compare interest rates, look at the period of the new loan. The consolidation loan may have a lower interest rate than your old loans but if it takes longer to pay off, you could end up paying more interest overall.
See More information for help on dealing with multiple debts.
What happens if you can’t repay a debt?
If you can no longer afford the repayments on a loan or credit card, the first thing you should do is contact your lender. It is not an option to simply stop paying. If you have borrowed money, you have a legal responsibility to repay the money you owe.
If you alert your lender to the problem early, you may be able to negotiate different repayments. This could involve making smaller payments but over a longer period.
If you don’t contact your lender or you can’t negotiate a solution, you may be contacted by a debt collector. If you cannot pay your debt or agree a repayment plan with the collector, possessions bought with the loan or used to secure the loan may be repossessed. You may also be sued in court for debts you owe.
If you can’t resolve your debt problems, a financial counsellor may be able to help you. A qualified financial counsellor can help you understand your finances, the causes of your financial difficulty and identify what solutions may be available and suitable for you. Financial counsellors can help you get back in control of your money – whether it’s creating effective budgets, working out manageable repayment plans, or working with your creditors by establishing a Debt Agreement.
There are several government and community services which provide free financial counselling. See Getting information and advice.
Bankruptcy and other legal arrangements
People who cannot sort out their debt problems sometimes apply to become a bankrupt. In some circumstances, a creditor can apply to have someone made a bankrupt.
Bankruptcy is a last resort. It has many disadvantages and adverse consequences. It has the advantage that it releases you from most of your debts and stops creditors from taking further action. However, you could lose most of your assets, including your home in some cases, you may be forced to pay some of your income to the bankruptcy trustee and you may face other restrictions. You will also find it harder to get credit in the future, even after your finances have recovered.
Depending on your circumstances, you may be able to establish a formal Debt Agreement or Personal Insolvency Agreement with your creditors instead of going bankrupt.
See More information.
More information
There's a lot more that you can find out about managing debt. See More information.