Don’t have enough money to pay your bills? Are you avoiding the phone because the collection agencies keep calling? Your financial struggles don’t have to end by declaring bankruptcy. If your biggest challenge is high interest rate credit accounts (like store credit or credit cards), combining these into a single debt consolidation loan (a personal loan) with a lower interest rate might be your best option. Consumers facing more challenges can consider credit counseling (which pairs you with a credit counselor who helps you develop a payoff plan) or debt settlement (which involves negotiating new terms on your debt.) The most important step is deciding to do something.
Benefits of a Single Payment
Combining your existing debt into a single payment has many advantages including:
Paying less every month: By using a personal loan to payoff other higher-interest rate loans, you spend less on interest payments every month. That way, you reduce how much you spend over the lifetime of a loan.
Making things easier to manage: Instead of writing multiple checks to different financial institutions every month, you write one. This eliminates the need to remember which loan to pay, where to send each payment, and on what day of each month the payment is due.
You Have Options
The following are three ways to reduce your debt. Keep in mind that the most important thing is finding the solution that works for you.
Do it yourself: Simplifying and reducing your obligations start by determining what type of loan makes sense for your situation. You can contact your creditors directly to see if they're flexible in working out more favorable payback terms. Next, you'll want to shop around for the best loan (and best interest rates) that fits your situation. This can be as easy as finding a new credit card with better terms than your existing ones (a credit card balance transfer). Once you're approved and receive the money, the next step is paying off your existing loans.
Local financial institutions: Walk into your local bank or credit union and ask to speak with someone who can help with managing your debt. Local banks and credit unions value local business. They are frequently interested (and capable) of working with clients to help them out of financial trouble.
Debt service companies: Companies like us help you find the best solution for your needs and then match you with a service provider that can help. We offer you a variety of approaches to help you become debt free. Other services merely assist with creating a game plan to tackle your debt or take over your loans and deal directly with your creditors.
Finding Your Solution
You may be struggling under a lot of expensive debt. Professional help is available to help you get out of it. The three main types of professional services are credit counseling, debt management and debt settlement.
Credit counseling services: Credit counseling firms help address the core of your financial problems. They can help you develop a budget, guide you through managing your money and debt, and devise a framework for getting out of debt. Nonprofit firms, local banks, credit unions, housing authorities, and even local universities provide credit counselors to help people deep in debt. Not all these services are free, though. It is important to understand how they operate and what, if anything they charge. The United States Department of Justice maintains a list of approved agencies.
Debt management plans: If your current debt problems are bigger than just learning better financial management, a credit counselor might recommend enrolling in a Debt Management Plan (DMP). DMPs ask you to make a monthly deposit with a credit counseling company. The company uses this money to pay off your unsecured loans. Frequently, DMPs can negotiate lower interest rates or get your creditors to waive certain fees. DMPs frequently work off a 48-month plan. Always ask to see what the payment schedule looks like before you select a DMP.
Debt settlement programs: Unlike DMPs, which work out payment plans, debt settlement companies negotiate lump sum settlements with creditors for less than you actually owe on paper. To do this, the company typically requests that you set aside monthly payments into an escrow account that can be used to pay off your debts once an agreement is reached. As part of the negotiations, these programs can request that you stop making monthly payments to your creditors. Because this requires withholding payments, these programs run the risk of lowering your credit score.
First Steps to Take
Not sure which solution is best for you? Here's how to determine a suitable option:
- List all your debts on paper (including mortgages, car loans, credit cards, etc.)
- Next to these debts, write down the interest rates you're paying on them and how much you still owe.
- Look at how much you're paying each month (whether you're paying down principal, paying just the minimum payment, or less and getting penalized)
- Figure out how much money you'll spend in total paying off your loans (how much you pay each month multiplied by the length of your loans). Our debt calculator can help.
- Shop for a comparable loan for a smaller amount than your existing one. If you can find one, be sure to use your loan to pay off your existing loans.
- If you don't qualify for a better loan, consider other options such as credit counseling or debt settlement .
Impacts to Your Credit Rating
Reducing your debt can have a mixed impact on your credit score, depending on how it is accomplished. If you have credit card payments that you simply cannot make. or loans that are delinquent, combining these into one payment and paying them off should improve your credit score over time.
Credit agencies also use what's called a utilization score -- a ratio of how much of your credit limit you actually use. Low utilization scores (meaning, you use less than your maximum credit line) improve your overall rating. So when you pay off a maxed out credit card, you may see an improvement in your credit score.
However, you'll probably want to keep some credit lines open, even after you pay them off, to see a positive impact on your score. This way your credit utilization score remains relatively manageable.
On the other hand, removing old loans and replacing them with new ones may be seen as a new risk factor to the credit agencies. However, once that debt is finally paid, you can work on improving your score.
Unlike doing this yourself, debt settlement firms negotiate with your creditors on your behalf. These companies help to reduce the total amount owed or get more favorable terms for paying them off. This likely hurts your credit score in the short term but is worth it for many people.
This whole process rebuilds your credit over the long term while you pay off all your debts.
The following are needed to qualify for a loan. Remember, if you don't qualify, you may be better suited for credit counseling or debt settlement.
Income: Banks and lending institutions are going to want to see your current income. One of the best ways for someone who lends you money (a creditor) to determine how likely he or she is to get paid back is by looking at a borrower's income and total debt.
In fact, there's a ratio – called the debt to income ratio -- to help lenders analyze how much debt a person carries relative to his income.
Payment history: Lenders want to see your payment history to get a feel for how you've paid back other loans and see if you are a stable borrower. Missed and late payments can be red flags for certain lenders.
Assets: These may or may not be needed. It's possible to find unsecured loans such as credit card balance transfers that don't require a person to pledge assets. Secured loans like mortgages or car loans structure terms so that if a borrower doesn't pay off a loan, assets like homes and cars can be sold off to ensure payments.
Are You a Good Fit?
Simplifying and reducing monthly obligations has helped many people get out of debt. With a single, lower interest rate loan, you can simplify servicing your loans and reduce your monthly payment. Remember to review our debt settlement and credit counseling sections for other options that may be better suited to you.
Word to the wise: The underlying problems that cause people to get into debt in the first place need to be addressed. It's a good idea to look deeper into your relationship with money in general. Review the articles on our site to learn valuable skills that can help you stay out of debt.
If You Can't Pay
Lenders expect their loans to be paid back and depending upon what type of loan you take, they have different ways to ensure they get their money.
Unsecured loans: These are personal loans you can get from a bank, a credit card, or other lenders that don't require a borrower to pledge assets. Lenders will check your credit score and your history of paying back similar types of loans to assess the probability that you pay back your loan. Not paying back this type of loan will hurt your credit score and impact your ability to get future loans.
Secured loans: These types require a borrower to pledge some type of asset to secure the loan. Some people choose a second mortgage or a home equity line of credit (HELOC). Lenders can put a lien on your asset if you fail to satisfactorily pay back your loan. Because they're less risky from the lender's point of view, the interest rates on secured loans are typically lower than those on unsecured loans. On the other hand, you put your personal property at risk when you take out a secured loan.
The Bankruptcy Option
In 2012, personal bankruptcies plunged to their lowest levels in four years, down nearly 20 percent nationwide. U.S. bankruptcy courts recorded 1,221,091 new bankruptcy filings in 2012, down 13 percent from 2011. As the financial crisis of 2008 runs its course, more people are saving money and reducing their credit card debt compared to levels before the crisis.
Another reason bankruptcies may be down is the complexity of the new Title 11 bankruptcy code. It is harder to wipe your debts clean by filing for bankruptcy. People who do follow the bankruptcy rules can receive a discharge – which is basically a court order saying you don't need to repay certain debts.
Bankruptcy remains on your credit report for 10 years (compared to seven years for bad debt) and may make getting future loans, buying a home or qualifying for life insurance hard. That said, it does provide a new start for many people who can't see their way out of debt in any other fashion.
Two Types of Personal Bankruptcy: Chapter 13 and Chapter 7
Chapter 13: This allows people with consistent income to hold onto property that they might otherwise lose in a bankruptcy proceeding. A court will use this income to determine a payment schedule over three-five years to discharge debts.
Chapter 7: Chapter 7 bankruptcy requires liquidation of all assets that aren't exempt. Some of your property may be turned over to your creditors or sold via a trustee – a court-appointed official.
Avoid Being Scammed
There are some people would like to take advantage of your financial situation. Scammers prey on people who believe there is a silver bullet that will solve debt problems. Some will offer loans for an upfront payment and not deliver the loan money. Others offer more complex offers using deceptive marketing practices. Keep an eye out for these warning signs .
Advance fee loans are schemes that guarantee a loan if you pay a fee in advance of receiving your money. This fee can be as small as $100 or as large as a few thousand dollars. Regardless, these practices may be illegal. Legitimate creditors will never guarantee that you will receive a loan. Under the Federal Trade Commission's new Telemarketing Sales Rule, a seller may not tell you that there's a high-likelihood of receiving a loan and accept advanced payment for that loan.
Avoiding a scam is not as hard as you think, but it does take work. Use the following to make sure the company you choose is legitimate.
Check 'em out: You can use the Better Business Bureau or the FTC Consumer Information websites to research a company and the services they offer. Contact your creditors and see if they'll work with the company you're talking to.
Use a magnifying glass: Make sure you read the fine print before you sign any agreement. And don't let yourself get pressured into doing anything, especially if it requires an upfront payment.
Watch like a hawk: Once you start working with a firm, you're going to want to keep close tabs on your statements. You can even call your creditors to ensure they're receiving payments on time.
After the past few years of one of history's worst recessions, many Americans find themselves burdened by expensive debt. Many companies took advantage of people in distress by promising things that weren't delivered while not adequately disclosing fees. Consumer's credit scores were impacted.
That's changed -- in 2010, the Federal Trade Commission cracked down on shady telemarketing businesses promoting shady services and continues to do so. This forced several companies to close down, meaning that there are fewer companies competing to service the rising debts of the American public.
This has created two tiers in the market. Smaller lenders are competing for bits and pieces of the market while a few large banks and financial institutions control much of the business.