Are you struggling to get out of debt with your current income?
If you’re worried that your income simply isn’t sufficient to get out of debt without interruptions, setbacks, and severe financial problems, you’ve landed on the right post.
I’ve compiled a comprehensive guide to help you pay off your personal loans even if your income is low. Let’s cover some important dos and don’ts and answer FAQs for further clarity.
Calculate and Analyse Your Finances – Net Worth vs Debt
First off, you need to analyse your financial situation and see where you stand.
To start, one thing you should absolutely do is to calculate your total net worth and the amount of debt you owe. This generally gives you a good idea on how secure you are, financially speaking.
To put this in perspective, let’s say you own a kitchen table worth $1000, but you still owe $500 on it. Its net worth will be $500. That means the net worth of the car is basically how much it can be sold for minus what you owe on it, which comes to $500.
The net worth to debt ratio is a useful indicator of financial security you may use to see where you stand. Once you calculate your net worth and the total amount of debt you owe, you’ll have a pretty good idea of how bad your situation is.
Pay off the Highest Debts First
This may initially sound counterintuitive, but if you want to get rid of your credit card debts, personal loans, and other loans you owe, it is a good idea to pay off your highest debts first.
Confused? Don’t worry. Here’s why: Your highest debt is the one costing you the most money in interest each month. It’s basic mathematics. The higher the amount of money, the more dollars you have to pay in interest.
Interest rates are pretty straightforward in that sense. For example, 15% interest on a $1000 loan costs you far less in interest than 15% interest on a $10,000 loan.
Once you pay off your highest debt and don’t have to pay lots of money in interest each month towards that loan, you’ll end up having more money to pay off your smaller debts.
Best Way to Manage Debts with Low Income
In this section, I’ll discuss what you should do with extra money, how you can manage debt, and how you can save money and pay off debt as quickly as possible.
- Cut Down Your Spending
Here’s an obvious tip: cut down on your spending! Try to spend as little as you can on things that aren’t absolute necessities.
You should definitely consider dropping some pricey brands you purchase from. You may consider signing up on websites where people give away their used free stuff, such as furniture and home appliances.
Consider switching your insurance supplier to cut back on insurance spending. Other than that, don’t feel shy in approaching food banks and other free services that can save you a lot of money when you’re struggling with basic necessities.
- Take up Freelance Work
Another attractive option you should definitely consider is to take up freelance work. You may already be employed at a salaried job. Instead of wasting your precious time off work, you can utilise your skills and take up valuable freelance work for a pretty penny.
If you have a skill that you can market, be it graphic designing, painting, web designing, content writing, or anything else you can sell by the hour, I recommend you make that extra money and start freelancing to supplement your low regular income.
In today’s volatile market, freelancing is one of the most popular ways to earn quick money. It may just be your ticket to going debt free too.
- See if You Can Reclaim Any Fees or Charges
You should look to reclaim any fees or charges that you might be owed or that you believe you were charged unfairly.
Millions and millions of pounds are lying unclaimed as insurance policies, investments, and lost bank accounts. If you’ve lost a bank account, you may opt for a tracing scheme to help recover the account and your money.
Other than that, if a bank has recently charged you wrongly or too much for some reason, such as breaching your overdraft, you can write to them and claim it back.
- Consider a Cheap Personal Loan
If you can get a personal loan at a very low interest rate, great! It may be just what you need to pay off your current debt as fast as possible.
It’s unlikely that your income can deal with regular repayments on its own. If you’re struggling with personal finance, it may be time to consider a cheap personal loan.
If you have a good credit score, this won’t be too much of a problem. However, if your credit score has taken a hit recently, you might get loans at very high interest rates. In that instance, they simply aren’t worth it.
- Try to Reduce Credit Card Debt Interest
One key thing you should try to do is to reduce your credit card debt interest.
How do you do that? Well, try to improve your credit score, learn about all the purchases you’ve made through your card, your current interest rate, and other details, and then call your credit card company and request them to lower your credit card interest rate.
If they agree, great! If not, don’t get disheartened. Ask them the steps you can take to possibly get a different response next time.
Another thing you should definitely consider is to try to pay more than the minimum payment each month. I understand that this might not always be possible with a low income, though.
- Avoid Borrowing and Consolidation Loans
At this point, you should definitely not be borrowing more money in an attempt to go debt-free.
Try to avoid borrowing as much as possible. It may seem like a lucrative option when it’s right in front of you, but more loans mean more interest, and that’s always problematic if your income is low.
Also, avoid the overly common practice of using consolidation loans to pay off your debts and then attempting to pay back the consolidation loan, since a large loan can come with a huge amount of interest that you might not be able to cope with.
Pay Off Debt with Extremely Low Income – Options to Consider
This section covers your options when your income is extremely low, and you’re in a very tough financial situation.
Let’s get into it.
- Talk to Your Creditors
If you’re strapped for cash, consider contacting your creditors and explaining your situation to them as clearly as possible.
It’s probable that they attempt to come to an informal arrangement that allows you to pay back your debts over time, usually as fixed monthly payments.
Court action can take quite a toll on your creditors as well, so it’s possible that they will be looking to avoid lengthy court procedures as well. If so, good for you! Try to reach an agreement that makes it easier for you to pay the debt over time.
- Try to Seek Help From the Government
The British government offers you a few solutions if your income is low and you’re finding it difficult to get out of debt.
For one, you may apply for tax credits, which are state-sponsored benefits, and they ensure financial support for disabled workers, children, and even low-income workers.
Don’t worry if you’re not paying tax or National Insurance, because tax credits are tax-free, which means they’re not conditional upon whether you pay tax or not.
Other ways to seek help from the government include applying for pension credit or child support benefits. You should definitely also check if you’re eligible for State benefits, and even if you meet the requirements for a free grant from the State.
- Pay in Instalments (Set up a Debt Management Plan)
Reach out to your creditors and see if you can get them to agree to a plan that makes it easier to repay your loans.
Usually referred to as a Debt Management Plan, this agreement allows you to come to a resolution that allows you to pay your loan back in instalments.
This obviously makes things easier if you’re low-income since you can probably afford small monthly payments much easier than you can pay a large debt back all at once.
Again, your creditors have to agree to your conditions before you have any sort of a valid plan to repay the money you owe.
- Consider IVA or DRO
IVAs and DROs are usually very effective loan management plans.
A DRO basically allows you to delay paying your debts for a one year period.
In essence, it is a court-appointed order that gives you the time to recover some and figure out how you’re going to pay back, let’s say, your car payments, minimum payments on your loans, and meet other expenses that you can’t meet immediately.
An IVA is a contract that sets a repayment plan to allow you to pay your loans off over a specified period. It involves a third party, your insolvency practitioner, and is only valid if your creditors agree to it.
- Seek Debt Help
If you need help or advice when you’re paying back your loans, try to seek out organisations that can assist you and offer valuable advice.
The format of advice can differ from organisation to organisation, some may be online, some may be in person, others over the phone.
Do evaluate your financial situation before you go seek help for your credit card debts or other loans and see how much you can afford to invest in debt help. If you can’t invest too much, consider free debt help agencies and charities such as StepChange or National Debtline.
How to Deal with Debt Collectors? (Know Your Rights!)
Debt collectors can be vicious and very persistent.
However, they get away with a lot of things they’re not allowed to do, legally.
For instance, debt collectors aren’t allowed to threaten you with court action to make you repay your loans, that’s technically considered harassment under UK law.
If you’re being hounded by collection agencies, you may want to pursue court action to get them to back off temporarily. Also, there are plenty of simple ways you can avoid these collection agencies, but if you’re confronted by them, you need to know how to deal with them.
Get in Control of Your Credit Cards
If you’re looking to go debt free as soon as possible, you need to get in control of your credit cards.
I’m aware of how easily people fall into the credit card trap, with promises of easy splurging and instant gratification. In reality, however, you’re giving up a lot more than you’re getting, and trust me when I tell you, credit cards definitely are not worth it.
For one, credit cards come with insanely high amounts of interest, so the longer you keep repaying them, the more money you have to repay in proportion to how much you initially got.
FAQs – Get out of Debt with Low Income
Should I pay off my mortgage with savings?
Yes, if you’re still in the early stages of repayment, since you’ll end up saving thousands of dollars in interest.
No, if you’ve been paying for several years now and are nearing the end of your repayment cycle. In this case, if you want to go debt-free, invest your savings elsewhere.
Am I eligible for Marriage Allowance?
You may be eligible for marriage allowance if between you and your partner, one of you is a basic rate taxpayer and the other is a non-taxpayer.
If you haven’t applied yet, do it and go debt free as soon as possible! You may be ignoring money that the State has kept for you!
Are secured loans a good idea?
No, secured loans are not a good idea in your current situation. If you’re putting up an asset that you simply can’t afford to lose, no matter what, these loans may not be right for you.
Try to look for unsecured loans at low interest if you can. That way, you don’t run the risk of having to give up an asset of yours even if you’re unable to make consistent repayments on your loans.
I can’t afford to pay for debt help, what to do?
Don’t worry if you can’t afford to pay for debt help! There are plenty of organisations out there that provide free debt help and advice to people in tight financial situations.
If you can’t make payments towards debt help groups that ask for a payment, consider organisations and individuals that do it for free.
Could I get a free grant?
Yes, you could very possibly be eligible for a free grant from the State.
If your total household income is low, you might be eligible for several grants from Charities and from the Government, which include grants towards monthly utilities and even education grants depending on where you stand.
Are payday loans a good idea?
No, payday loans are a bad idea if you’re looking to go debt free with a low income.
Just as with credit cards, while the promise of quick money may sound alluring, the interest on these loans is usually extremely high, so I don’t recommend them if you’re struggling to get by.
I understand how frustrating it can be to find yourself in a situation where your income is low, and you’re figuring out how to pay your debt off as quickly as possible.
I hope this article was helpful for you. If you need more debt advice, do reach out to us!