So I’ve been reading and looking into debt a bit more recently…
Personal debt is on the rise, and while smart debt isn’t necessarily a bad thing, it can quickly get out of hand. Careful shopping and strategizing can help you avoid a debt crisis. If you’re already in trouble there are ways to get out, but you do have to make it a priority. Doing nothing won’t help the problem and will only make it worse.
Here are three quick tips to prevent debt disaster in your life.
Start by choosing the right loan product
Ideally, the best time to begin your debt crisis prevention program is before you even assume the debt. Taking on debt is a serious responsibility, but you can make it easier on yourself by shopping around carefully for the right loan product, be it a mortgage, car loan, or personal loan. Research and compare terms, fees, and customer service experiences. For borrowers in the UK, I’ve just heard of the Readies website which is a great place to discover good credit practices and shop for the best loan deals. Meanwhile, in the US, I’d start with your local bank or credit union, and then explore online options if you aren’t able to get a loan from a bank.
The cardinal and pretty obvious rule when getting a loan is to not borrow more than you absolutely need – or more than you can reasonably afford to pay back (which can sometimes be different amounts). Sure, once you get approved for a loan, it’s tempting to pad the amount a little bit for an extra purchase, dream vacation, or extra spending money. But resist the temptation! A dollar borrowed today will cost you several 10 years from now. Save up for what you want, and you’ll appreciate it more, and avoid the buyer’s remorse that sets in when the payments last longer than the enjoyment.
Have a clear payoff strategy
If you have multiple debts in addition to your normal living expenses, your personal finances can become a virtual juggling act. That’s certainly the case with millions of Americans who not only have significant revolving credit card debt but are also juggling mortgages, auto loans, student debt, and personal loans. Even the most carefully chosen loan product can quickly become a cause for regret if you fall behind on your payments. To remain solvent – and preserve that all-important credit rating – you need to figure out the best method for paying off each kind of loan. And then decide what works for you.
There is a lot of hype about paying off your mortgage early, but there are things to consider before deciding to accelerate the payoff. If your mortgage carries a low interest rate, you might benefit more by applying the additional funds to paying off higher interest rate debts such as car loans, personal loans, or credit card balances.
You also need to ask yourself if paying your mortgage off a few years early is worth it if increasing your mortgage payments leaves you financially strapped for the duration of the mortgage. And if you are investing in other areas such as the stock market, you should consider whether the savings on your total mortgage cost – adjusted for the tax advantage you get from a standard 30-year mortgage – will cause you to miss out on higher earnings on other more lucrative investments. Most people find that when they look at the total costs and personal factors, paying off a mortgage according to a standard 30-year payment schedule is their best bet.
Meanwhile, although you’re better off not even having credit card debt or personal loans, if you do – pay those off as fast as possible.
What to do if you’re already in trouble
Carefully shopping for loans and sticking to mindful strategies to pay them off can keep you out of trouble. But what if you’re already in trouble? For many folks, handling multiple debts is no longer anything remotely resembling a juggling act. They have dropped so many balls that indebtedness has become a real problem.
If you find yourself in a position where your debts are untenable, and changing your spending habits won’t solve the problem, you really need to take steps to reduce your debt-related expenses, often in the form of debt relief. A debt relief program will not be easy, and is certainly not the preferred method of handling your indebtedness, but done correctly, it can make your life significantly less stressful, and set you on a course to better financial management. There are different types of debt relief, and the one you should choose will depend on several factors.
If there is just no way you will be able to pay off your debts according to the existing terms within five years, or if your unsecured debts equal or exceed half your gross income, consider seeking a low-interest loan to consolidate those debts into a single, significantly lower monthly payment. If that is not available, you should talk to your creditors and see if they will work with you to reduce your payments, lower the interest on the debts, or even reduce the amount you owe.
As a last resort, you should consider filing for bankruptcy protection if there is no way to work yourself out from under your current indebtedness. Being declared bankrupt effectively discharges most of your unsecured debts. Your credit score will take a hit if you seek debt relief, especially if you are declared bankrupt, but at least you will have something of a fresh start upon which to work to rebuild your creditworthiness.
Finally, avoid debt-relief companies, as they offer little that you cannot do yourself, charge a significant fee for their efforts, and can often leave you in worse credit shape. Do your homework, clean up your spending habits, and don’t be intimidated about seeking assistance. It might be the best thing you can do for your financial well-being and peace of mind.
Debt is best avoided – but sometimes it has it’s benefits. By doing research ahead of time, and developing a plan to stay current with your payments, you can maximize the benefit of borrowing — and maintain control over your finances.
For the comments: How do you recommend people manage debt? Do you believe that there is good/bad debt in the first place?