We all want to avoid a bad debt situation. But at the same time, it is not encouraged that we eliminate the use of credit. Society have placed a huge importance to credit scores and that means you have to keep using credit in order to maintain a good record. This is really not something to be overly concerned about because if you know how to manage your debt well, you can keep it from ruining your finances.
However, there are instances wherein debt becomes a problem – not because you were irresponsible with money, but because of certain curveballs that life throws at you. Even if you borrow money wisely, if something changes in your life, you could be faced with a debt situation that you can no longer handle.
If you think about it, this is probably what happened to a lot of consumers when the Great Recession happened. They had everything under control – even their huge credit card and mortgage debts. But when the market crashed, their debt suddenly became a huge problem.
At that time, you can blame the economy for what happened to your finances. But do not feel complacent right now if you hear reports that the economy is recovering and doing very well. There may be personal changes in your life that can suddenly transform your debt into a financial catastrophe.
3 unexpected life situations that can make your debt problem worse
There are three unexpected situations in your life that could make your debt a big problem.
You got a car loan for a new car, then one of you lost a job
We actually got this problem from an article published on Credit. According to one consumer, they recently got a car loan in order to buy a new car. They got approval and was actually using the car already. However, life seemed to play a joke on them because the wife got furloughed from work. The debt situation was probably a breeze if two of them earned an income each month. But when one lost their job, that can become a problem.
In this scenario, the change was something that was beyond their control. But even if that is true, the lender only cares about your payments. So what can you do to keep this from totally ruining your finances?
The article suggests that you talk to the car dealer to ask if you can return the car. Of course, the value of the car will be lower than what you paid for. That is already a loss that you cannot get back. If you traded it for an old car, you will still be at a disadvantage.
Another suggestion from the article is to sell the car to someone else. This will probably help keep your losses low – but only if you find the right buyer. Also, time is of the essence here because you need to find a buyer fast to keep your depreciating car from losing you more money.
Getting rid of the car, and in effect, the car payments, seem to be the only way that you can save your finances because of the unexpected job loss.
You got a home loan and shortly after, an illness with expensive medical treatments
The next curveball that can happen to you involves your home loan and your health. In this scenario, you get a home loan because you think you can save more if you use what would be the rental money and pay it towards the amortization of your house. But then again, another cruel circumstance happens – you or a member of your family becomes sick. This sickness is something that suddenly bloats your expenses. Instead of saving you money, the home loan suddenly becomes a problematic debt situation.
Since you need to prioritizes spending on your health requirements, you have no choice but to put other expenses in the back seat. Sometimes, people choose to use their home loan. One way to help you out of this situation is to refinance your home loan. According to TheMortgageReports.com, the low mortgage rates is currently igniting a home refinance boomlet. That means people are using the equity that they have on their house to help them survive a current financial problem.
But the thing is, your situation cannot use this option because you only got your home for a short time before the medical need came to your family. That means you do not have enough equity yet. What you can do at this point is either to try earning more or to just get rid of your house. You do not have to go back to renting. You can sell your house and transfer the mortgage responsibilities to the new owner and just buy a smaller home that you can afford considering your medical expenses. You can even get a home that has a basement or garage that you can rent out. That way, the lease of your tenant can probably take care of your monthly amortization and at the same time, help you build equity on your home.
You got a student loan for a college degree but you cannot find a high paying job
The third scenario that can turn your debt situation into a big problem involves student loans. According to NewsWeek.com, it is estimated that new graduates are still lagging behind when it comes to joining the workforce. In fact, they make up 40% of the unemployed in the country. Since a lot of college graduates use student loans to help them finance their education, you can expect that a lot of these unemployed graduates with have a debt situation in their hands. If it takes them more than 6 months to get a job, their grace period would be over. They could encounter problems in paying back their student loans.
Now what can you do to keep your student loan problem from getting worse? You have a couple of options but you need to start by talking to your loan servicer or lender. You need to discuss your options with them so you will know what you are qualified to apply for. For the sake of information, here are a couple of choices that you have.
- Find employment in the public sector. Most of the time, there is a huge demand for professionals in the public sector. The pay is low, but you can qualify for income-driven repayment plans. This means you can use your income as a basis for your monthly payments. And if you employ yourself in the right sector, you can qualify for the Public Service Forgiveness Program.
- Apply for deferment or forbearance. When you are in a tough financial situation, you can apply for the temporary postponement of your loan payments through deferment or forbearance. That way, you can delay payments without ending up in default.
- Join the army. This is a great way to qualify for deferment and possibly get funds to pay off your loans. If you serve an active duty, you may be able to get rid of your student loans fast.
All three of these scenarios can make your debt situation worse so you need to act fast in order to keep it from ruining your financial future.
How to keep your debt from becoming a financial catastrophe
There are a couple more habits that you can implement if you want to keep your debt from becoming a financial crisis. Here are three that can help you do this.
- Set up an emergency fund. If you want to secure your finances despite your debt, you need to build up your emergency fund. That way, unexpected scenarios like losing a job or an illness will not make debt payments too much of a burden. Set up your finances so you have a much as 6 months to a year’s worth of living funds.
- Borrow lower than what you can afford to pay. In case you have to borrow money, you need to loan an amount that is actually lower than your payment capabilities. For instance, if you can afford to borrow a loan that will ask you to pay $1,000 a month, choose a loan that will only require to you pay $500. That way, you are not stretching your budget to the limit. In case you have an unexpected expense, you can meet that without compromising your other debt payments.
- Do not add more debt if you can. If possible, do not use your credit cards or get other loans. At least, until you are sure that it will not endanger your current debt situation. Keep your debt balance low and improve your credit score. If you got a car loan, pay that off first before borrowing again. If you have a home loan, since this takes longer to finish paying off, make sure your equity is high before you think about borrowing another loan.