- Balance your finances
- Debt management strategies
- Take control of your finances with Red Tree
- Frequently Asked Questions
When life throws a curveball (or two), a personal loan might be the quickest way to get cash fast. But when multiple emergencies happen at once, those loans can spiral out of control until it feels like you’re drowning in debt. If paying off debt is a priority for you this year, a debt consolidation loan can help you do it. But it’s not the only way, so we’ll guide you through how to reduce debt and pay off large amounts fast.
Balance your finances
Create a budget
No matter how you got into debt, the main thing is to take stock of where you are right now and make a plan to pay down the money you owe. The first step is to create a detailed budget, taking into account your income and expenses. Your budget should include:
Sources of income:
- Wages from your employer
- Interest accrued from savings accounts
- Government payments
Your expenses:
- Rent/Mortgage repayments
- Routine spending (daily coffee or eating out)
- Subscriptions
- Insurances
- Vehicle expenses
- Bills
- Debt Repayments
With your income and expenditure written down, you can easily see how much money you have left over to put towards your debt repayments. You can even see if there are unnecessary expenses you can cut back so you have more to put towards your outstanding loans.
Build an emergency fund
You might want to pay off your debts as fast as possible, but it’s just as important to build an emergency fund. If you don’t have any savings, the next unexpected expense that comes up might have you scrambling for another loan, which could make your debt problem even worse.
Your goal should be to set aside three to six months worth of expenses to cover emergencies, but you can start small. Even putting aside $50 will give you something to fall back on.
To give yourself a headstart, you could look around your home for unused or unwanted items and sell them for money.
Debt management strategies
There are several debt management strategies that can help you repay your loan faster and reduce the total interest paid, ultimately saving you money. Choose the one that suits you best, and start working towards reducing how much you owe.
1. Debt Snowball
The debt snowball strategy focuses on paying off your debts, from the smallest (typically highest interest) to the largest (lower interest). Once your smaller loan is paid off, the repayments that you would have to pay on those loans can now be used on the next smallest loan to repay it quicker. As you continue to pay off your smaller loans, you’ll have more funds available to put towards the others.
An example of the debt snowball strategy:
For this example, assume you had the following debts:
- Loan 1: $500 (42% interest p.a)
- Loan 2: $1000 (38% interest p.a)
- Loan 3: $1500 (30% interest p.a)
- Loan 4: $2500 (20% interest p.a)
And your weekly repayment cycle looks like this:
- $20 per week to repay Loan 1
- $40 per week to repay Loan 2
- $60 per week to repay Loan 3
- $100 per week to repay Loan 4
By paying extra money per week to pay off Loan 1, then you’ll have an extra $20 to put towards the next biggest loan. Then once the next biggest loan is repaid, you will have an extra $40 from Loan 2 plus the $20 from Loan 1 to put towards the next biggest loan.
2. Frequency of Repayments
To help you get ahead of your repayments, you should look to pay more than your minimum repayments. For example, if you have a repayment of $250 per week, and you can afford to repay $350, then you would reduce the amount of time taken to repay that loan. By making extra repayments you will also reduce the amount of total interest you will pay.
Find out more about when your loan interest rate is calculated. If the interest fees are calculated daily on the outstanding balance, then by repaying extra money towards your loan before your repayment cycle, you will be able to reduce the amount of interest you pay.
An example of how earlier repayments save you money
In this example, assume you had a debt of:
- Loan amount: $25,000
- Interest rate: 10% p.a
- Standard weekly repayment: $250
- Loan term: 1 year
| Repayments per week | Amount of interest paid | Time taken to repay loan |
| $250 | $1,328 | 12 months (52 weeks) |
| $350 | $960 | 9 months (38 weeks) |
| $450 | $775 | 7 months (31 weeks) |
| $550 | $660 | 6 months (26 weeks)/td> |
As you can see, the more money you can afford to repay per week will not only reduce the time taken to repay the loan, but also the total interest paid.
3. Debt Consolidation
A very popular way to repay your debts fast is to get a debt consolidation loan. This loan combines multiple smaller loans into one loan with one repayment cycle. When you consider a debt consolidation loan, it’s important to check that it will reduce the amount of interest you pay over that time.
An example of debt consolidation:
Let’s use the same example we used earlier in the debt snowball section:
- Loan 1: $500 (42% interest p.a)
- Loan 2: $1000 (38% interest p.a)
- Loan 3: $1500 (30% interest p.a)
- Loan 4: $2500 (20% interest p.a)
The total interest paid over 1 year is $1540.
If there was a debt consolidation loan being offered at 25% interest per annum, and you combined your total debt of $5,500 into one loan, then you’d end up paying $1375 – saving you $165 every year!
To take out a debt consolidation loan whilst having multiple smaller loans, you may need to have a good credit score. If you don’t have a good credit score because of your loans, you could consider a secured loan, which may require an asset like a car as collateral.
Take Control Of Your Finances With Red Tree Finance
Reducing your debt takes time and patience, but with the right mindset and consistency, you’ll be on your way to debt-free living. Whether you need help with creating a budget or are looking for a debt consolidation loan, the expert team at Red Tree Finance can help! For more information or if you have any questions, don’t hesitate to contact us today.
Frequently Asked Questions
What is the fastest way to reduce debt?
Some of the best strategies to reduce the size of your debt include:
- Debt consolidation: Combining smaller debts into one loan so you only have one repayment to meet each cycle.
- Debt snowball: Pay off the smallest loans first, then use the normal repayments from this loan into the next one and repeat.
- Pay more each repayment cycle: Paying more than the minimum repayment can help you pay off the debt faster.
Is $20,000 a lot of debt?
The average consumer debt in Australia is $9,000. If you have a total debt of $20,000, then you should create a budget and a repayment plan to find ways to pay it off.
How to pay $30,000 debt in one year?
If you have $30,000 in debt and need to repay this amount in one year, then you will need to allocate a minimum of $577 per week + interest. Some strategies to help you pay it off quicker include:
- Selling unused or unwanted items around the house to put towards the debt.
- Repay more than the minimum required repayments.
- Sell your car and purchase a cheaper car, then use the extra money towards the loan.
- Get a second job and dedicate that income towards the loan.\
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The information provided in this blog is of a general nature and is provided without considering your specific objectives, financial situation, or needs. It is intended for informational purposes only and should not be relied upon as financial, investment, or other professional advice.
Before making any financial decisions or taking action based on the information presented, you are strongly encouraged to assess its appropriateness in light of your individual circumstances. Red Tree Finance does not intend to provide personalised financial advice, and you should seek independent financial, legal, tax, and other relevant advice tailored to your unique situation.