When mapping how to get out of debt with no money, it can feel like you’re set up for failure. Seek professional advice, and you’ll often run into a tell-tale message about how you should avoid debt in the first place. Make no mistake—it’s essential to learn how to create a budget, track your spending, and set financial goals, but what do you do about the debt you’re already carrying?
The average American household owes a significant amount of debt. In 2018, the Federal Reserve estimated that the average household debt exceeded $130,000.1 Although there’s been some indication of debt per person decreasing in the past few years, inflation is putting up a roadblock to debt payoff.
If these roadblocks are in your personal finance path, then consider this article your compass to navigate them. There are ways to get out of debt and you can learn how to lower debt to income ratio, even when you don’t have the cash necessary.
What Happens if You Can’t Afford to Pay Your Debt?
The longer you ignore late account statements, the higher the cost to your current and future financial prospects. Depending on state law and collection practices of your creditors, not paying and fulfilling debt may result in:
- Late fees and penalties
- Accumulating interest
- Debts sold to collection agencies
- Reports to your credit report history and reduction in your credit score
- Repossession of your vehicle
- Future services by medical or other providers refused
- Foreclosure on your home
- Inability to be approved for financing in the future
All of which is necessary to avoid furthering the negative debt spiral.
How to Pay Off Debt With No Money
Before taking action, make sure you’re aware of all the facts. Start by gathering:
- All debt statements and their interest rates
- Your credit reports and scores
- Your monthly expenses and income
With this information at hand, you’ll be ready to consider options for debt payoff.
#1 Start with Professional Help
When you’re struggling with secured or unsecured debt, you may think that you can’t afford financial planning help. But there are debt consolidation organizations specifically set up to help with this.
Nonprofit credit counseling is available to help individuals struggling with debt management. These organizations usually provide free resources and workshops plus individual counseling either at no cost or for a low fee.2 They can help you:
- Create a debt management plan
- Negotiate with creditors on interest rates, fee waivers, and payment extensions
- Decide if a consolidation loan is wise for you
- Develop a budget
- Obtain credit reports and understand your credit history
#2 Swap Multiple Debts for One Consolidation Loan
Applying for a personal loan for debt relief may seem counterintuitive, but your overall goal is to control spiraling debt. With a consolidation loan, you can reduce your rates and fees and make progress on paying down your total debt over time.
A fixed-rate debt consolidation loan is a single loan that pays off multiple current debts. The benefits of this type of loan include:
- Having a single payment to manage instead of several debts to juggle
- Converting higher interest rates to a single lower rate
- Reducing the risk of fees and penalties from multiple creditors
- Setting a timeframe for paying off your debt instead of constant credit card catch-up
However, a consolidation loan may not be the best option. Keep the following in mind:
- Fair to poor credit (score of 689 or below) may not qualify you for a low-interest rate5
- Monthly debt payments (including rent/mortgage) exceed 50% of monthly gross income
- Your spending habits create a debt snowball effect
If any of these apply to you, you’ll need to address these first and foremost, before tackling the consolidation loan.
#3 Borrow Against Your Home Equity
Homeowners with at least 15% equity can consider a fixed-rate home equity loan to pay off higher-interest debt. If you’re planning on using a home equity loan to pay off debt, most lenders want to see:
- Excellent mortgage payment history
- Credit score of at least 6206
- Debt-to-income ratio (DTI) no higher than 43%
- Stable income and a solid income history for the past two years
You’ll typically be able to get a lower interest rate on a loan secured by your property as opposed to credit card debt. That said, you’ll also be taking on the risk of a lien or foreclosure on your home if you can’t repay the loan. Plus, you’ll need to cover closing costs of 2% – 5% of the loan amount.7
You can typically borrow up to 80% of your equity (or up to 90% for some lenders), and the better your credit score, the lower the interest rate you’ll be offered.
#4 Apply for a Cash-Out Refinance
With a cash-out refinance vs home equity loan, you’re swapping your current mortgage for a new one that pays off what you still owe on your house plus an extra amount of cash back for a larger total loan. This means you’ll move backward on the path to paying off your home, and trade in the equity you currently own for cash.
So when is a debt consolidation refinance a wise choice? Using a cash-out refinance for debt repayment can work if you:
- Aren’t paying off lifestyle debt that will keep accumulating
- Can make timely repayments with certainty to prevent losing your home
- Keep your equity above 20% to avoid paying monthly private mortgage insurance (PMI)
- Avoid swapping to a higher interest rate than your current mortgage
- Can cover closing costs on a refinance (typically 3% – 5% of the loan amount)7
#5 Reduce Your Expenses
If you have a solid grasp on your monthly expenditures and understand how your spending matches your budget, then you can start to identify where spending can be cut or marked down.
If not, start using a budget spreadsheet or app to track all of your monthly expenses—down to the penny—in order to discover what you’re spending and where you can find opportunities to remove them. This often includes:
- Coffee runs and other small daily expenses
- Restaurant bills, in exchange for home-cooked meals
- Purchases and fees based on convenience, whim, or poor time management
- Luxury self-care products and services
Consider lower-cost options, less frequent buys, and exploring community resources. This could mean using your library card to borrow audiobooks instead of an Audible subscription, opting for a lunch get-together at a mid-range restaurant instead of a high-end dinner-and-drinks evening, or making coffee to go and avoiding Starbucks altogether.
You don’t have to become a coupon clipper or cut out all fun in order to reduce expenses—even small changes can free up cash each month to pay down your debt and make a big impact over time.
#6 Increase Your Income
While this step is easier said than done, one way to pay down debt faster is by growing your income level. Brainstorm around each of these options to identify possibilities to grow your wealth and pay off your debt over time:
- Work a part-time or seasonal job
- Apply for higher-paying positions (either take one or leverage offers for a raise)
- Offer consulting or freelance services in your profession
- Do lawn care, snow shoveling, or odd jobs for neighbors
- Put together a case for a raise with your employer
- Sell belongings you don’t need or use on eBay, Facebook Marketplace, or Craigslist
Getting out of debt can be stressful and overwhelming, especially with no money. However, there are 6 ways to get out of debt even when you don’t have the cash necessary, which include:
- Get professional help
- Swap Multiple Debts for One Consolidation Loan
- Borrow Against Your Home Equity
- Apply for a Cash-Out Refinance
- Reduce Your Expenses
- Increase Your Income
- Fortunly. 27+ Consumer Debt Statistics that Highlight America’s Debt Crisis. https://fortunly.com/statistics/consumer-debt-statistics/
- Consumer Financial Protection Bureau (CFPB). What is credit counseling? https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/
- FCAA. Find A Credit Counselor. https://fcaa.org/find-a-credit-counselor/
- NFCC. Agency Finder. https://www.nfcc.org/agency-finder/
- NerdWallet. What Is Debt Consolidation, and Should I Consolidate? https://www.nerdwallet.com/article/finance/consolidate-debt
- Bankrate. How to get a home equity loan with bad credit. https://www.bankrate.com/home-equity/home-equity-loan-bad-credit/
- Forbes Advisor. Today’s Cash-Out Refinance Rates. https://www.forbes.com/advisor/mortgages/cash-out-refinance-rates/