How to deal with Debt
Having too much credit debt is an unfortunate problem that affects a majority of Americans today. Interest rates are often so high that you may end up paying several times the amount you actually borrowed throughout the course of the loan. A college loan for 20 years at an interest rate of 9% a year for 10,000 will result in a total payment of over 30,000 by the end of the 20 years. Often, individuals may borrow money and not realize how high the interest rates actually are. As they pay back the debts monthly, they will realize that they are pay more in interest than the actual loan itself. What happens next?
Slowly the debt will continue to mount and many people have a hard time paying back the loans and might potentially even be late in payments. Having a huge debt build up can cause a number of long lasting negative effects. At this point, the individual’s credit score could plummet and cause interest rates for future loans to increase. Sometimes creditors will seize assets after late payments. Don’t fright though! There are a number of ways that you can avoid this situation and keep your debt in check.
- Take money from your saving account. Often, this is the last thing that you may one to do. You may think your return on investment is not worth taking the money out to pay back the debt. However in many cases, your return on investment will not even come close to the rate at which you have to pay for interest. Taking money from your savings and paying back the debt will often be more beneficial in the long run than attempting to make a return on investment.
- Take a 401(K) Loan out. Many employers will allow you to borrow money equal to 50,000 maximum or half of your 401(K) savings. The interest rate on a 401(k) loan is significantly cheaper than the interest on a credit loan. The good thing about a 401(k) loan is that you are simply paying back yourself and not a creditor. One of the negative factors about this is if you fail to pay back the entire amount within five years. If you leave your place of employment before then, the loan is simply treated as regular salary and you are taxed for it immediately.
- Asking friends and family for help. Friends and family are normally there for you when you need them the most. You are able to negotiate with your friends and family and can typically borrow money from them with low or almost no interest rate. This can help you get back on your feet easier. However one of the negative aspects of borrowing from friends and family is a lack of motivation. Often when individuals borrow from friends or family, they slack off on the payments and believe that they can pay them back whenever. This is a bad way of thinking and often leaves to a breakup in friends and even suing in court.
- Negotiating a new deal with your creditors. Some people believe that creditors are attempting to get their money back at all costs. This is not the case. Creditors, who believe you are having a hard time paying back debt, will often be open to negotiation. In the end, creditors just wish to receive all their money back even if it means changing up the terms a little. Many time creditors simply wish to avoid a total loss in case you file for bankruptcy. This could provide you with more time to pay back your debt or even a lower interest rate.
- File for bankruptcy as a last resort. If you have exhausted all your other options, filing for bankruptcy is your best option to prevent a total loss. Filing for bankruptcy will offer you protection and in many states, prevent your house and car from being seized. In some cases, creditors will be willing to give you more time to pay back you loans if faced with this prospect. Other times creditors will simply forgive the debt and consider it a loss.
Filing for can have some serious damaging effects for the next 7-10 years. On average, bankruptcy will cause a deduction of 175 points in credit score. This will give you the highest rates when applying for future loans and mortgages. Some creditors will simply not lend you money because the low credit score that you currently have. In order to slowly build back up your credit score, you must make all payments on time despite the higher interest rate.