How to get out of debt: managing existing loans

16th July 2018

By Kurt Wood

Debt can be a slippery slope once you get into the habit of borrowing, and it can spiral out of control very quickly if you’re not careful. Keeping a close eye on any loans and credit cards is a must if you want to avoid the dreaded debt trap. But for those who have already gone too far, there are ways to turn things around and sort out your finances for good.

Here’s how to consolidate debt, pay off loans and credit cards efficiently, and get out of debt.  

Understanding ‘good debt’ and ‘bad debt’

There are very few people who can go through life without incurring some debt. Whether it’s a student loan for college and university, a mortgage for a house, or a credit card for emergency cash, getting credit is often an essential part of living. The key thing to remember is that there is ‘good debt’ and ‘bad debt’.

Typically, student loans and mortgages are considered as good borrowing. This is because these types of loans are considered to be an investment. They will either grow in value (such as equity in your property) or can help you generate long-term income (such as a degree to kick-start your career).

Other good debts include car loans, business loans or low-interest loans for home improvements. Bad debts are those with very high interest rates, such as credit card spending, cash advance loans or payday loans.

The first steps of debt management

Understanding the difference between good debt and bad debt is important when deciding whether you really need credit or a loan. Good debt can be just as much of a burden if you overreach yourself with instalments that you can’t afford.

Once you start to struggle with repayments, it can be a downward spiral. The first step of debt management is to acknowledge the problem. The first phase should be putting a stop to the vicious cycle of borrowing. This means avoiding further credit if possible and looking at a long-term solution instead of living day-to-day.

Although you don’t want to take on additional borrowing, it might be worth considering a consolidation loan if you have multiple credit cards and loans to pay off.

What is debt consolidation?

Debt consolidation is a refinancing solution that involves taking out one loan to pay off other loans. This is suitable for anyone who makes multiple repayments across different credit cards, loans and overdrafts, but not necessarily for those with one large source of debt.

The purpose of debt consolidation is to bring all your loans into one place, so you can easily manage your total balance. To pay off your debt consolidation loan, you will have monthly instalments. This is usually a fixed rate and is often cheaper and easier than juggling multiple payments.

Should i get a loan to pay off debt?

If you have multiple loans that you struggle to keep up with, the best way to consolidate debt is often to take out a loan to pay them off. Consolidation loans can make your finances easier to manage, while also saving you money on interest by bringing all your repayments together.

Be aware that you might struggle to get a good deal if you have a poor credit rating. Although there are bad credit loans available to those with a bad credit score, they don’t tend to come with the best rates.

Taking out a consolidation loan is only recommended if you can comfortably manage the monthly repayments. Otherwise you risk further damage to your credit rating.

Tips for paying off credit cards

If you can’t get a loan to consolidate your debts, make sure you have a plan to pay off your credit cards. Reducing your debt is the best way to improve your credit rating. Here are some tips on paying off your credit cards faster:

Don’t just make minimum payments: minimum payments barely scratch the surface of your total balance. Use a credit card interest calculator to work out an amount you can pay each month to reduce your debt total as quickly as possible.

Set payment reminders: don’t miss any monthly payments. If you do, you’ll be charged more, and the late payments will show up on your credit file. Set payment reminders or set up direct debit payments.

Pay off cards first: the best way to go about paying off credit cards is to tackle the highest interest account first. This way, you’ll minimise the interest incurred over time.

Settle small balances for a quick win: reducing the number of loans/credit cards you have open can be beneficial for your credit rating too. If you have a card with a small balance, it could be a good idea to close this first.

Tips for paying off loans

Do you have multiple loans that you need to pay off? Read our tips to see how you could pay them off quicker:

Pay off loans first: when it comes to loans, it’s best to pay off bad debt first. The highest-interest loans will set you back the most so make sure you prioritise these.

Refinance your loans: debt consolidation can reduce your monthly repayments. Not only can you take advantage of better interest rates, you can also simplify your finances with one single payment instead of multiple ones.

Repay loans with ‘super transfer’ cards: if you’re disciplined and have a good credit score, it could be an idea to pay off loans with credit cards that offer interest-free transfer. These ‘super transfer’ cards can transfer money directly into your bank account and if they come with a 0% interest period, it could help to save you money. Beware of the added fees though. 

Talk to your lender about extra payments: for unsecured loans, you should be able to make extra payments of up to £8,000 within a 12-month period without any penalties. Make sure you contact your lender to find out if you can do this.

How to manage monthly payments

To manage your debts, you need to set a budget each month. Using a monthly outgoings spreadsheet is the easiest way to keep an eye on how much is coming in and out, and how much expendable income is left over.

Checking statements for loans and credit cards is also recommended so you can keep up with any changes. For variable interest borrowing, this is particularly important, because your creditor won’t let you know in advance when your interest rate changes.  

Where can I turn for debt advice?

If you’re worried about debt and don’t know where to start, there are a number of places you can turn to. You can book a meeting at your local Citizens Advice Bureau to speak to someone in person, and many of the UK’s leading charity organisations offer support, too. Step Change, Debt Advice Foundation and National Debtline are all great examples.

These charities will give you impartial advice on your debts. Ask them to talk you through the different options available including consolidation loans, debt management plans, individual voluntary arrangements (IVAs) and bankruptcy.

Find debt consolidation loans online

Before applying for any loans, check your credit report online and also using a loan eligibility calculator to see if your application is likely to be accepted. Most eligibility calculators are free to use.

If you’re not entitled to the loans you want, you could look into guarantor loans, which work by having a guarantor (usually a family member or friend) agree to make your repayments if you fall behind on them.

Use the giffgaff loan comparison tool to start comparing personal or guarantor loans now.

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