Learning how to deal with debt is not the easiest lesson. This is especially true if you are already drowning in it.
The sad thing is, you cannot live without debt – or at least it is difficult to not have debt. Our society has made debt quite important by inventing the idea of credit scores. This score is something that will help lenders and creditors determine if you can be trusted with a credit account. In order to have a good credit score, you need to be in debt and display good behavior in paying it back.
In our society, consumer debt indicates confidence in the economy. It also indicates that you are confident about your personal financial position. After all, you will only borrow money if you know that you can financially deal with debt. Unless of course you are facing an emergency. But even then, you cannot borrow money unless the lender knows that you can handle the credit that you are taking out.
Since our society treats debt as the norm, you need to understand that it is up to you to be careful about how much money you will borrow. You need to make the right choices because if not, you can end up compromising your future. It is important for you to determine if debt will bring you financial wealth or death.
According to a recent survey from Bankrate, 37% of Americans are in a dangerous financial situation. It is revealed that 24% of the survey respondents have more credit card debt than their savings. 13% of their survey respondents are in a different situation but it is no less dangerous. They said that they do not have credit card debt, but they also do not have any savings. That means if something happens that will require them to spend beyond their budget, they could end up in debt – just like that.
Both of these situations can make their finances turn for the worse – with just one emergency situation.
While borrowing money is not necessarily something that you should avoid, you should always be careful to loan only what you can afford. When you end up borrowing too much, it might be more difficult to deal with debt.
Signs you borrowed too much on these top 4 debts
There are so many debts out there but we will be concentrating on the top four debts in the country: mortgage, student loan, auto loan and credit card debt. Let us discuss the signs that you borrowed too much money on these different loans. Later on, let us discuss how you can handle these debts after you have put yourself under so much debt.
Buying a house is one of the most expensive purchase that you will make. That makes mortgages one of the highest debts in every American household. Although that is true, this type of debt is something that will help you grow your equity. As you send in your payments, the equity in your home grows. That signifies that you own more and more out of your home.
The sign that your mortgage is starting to become more than what you can handle is when you find the monthly amortization difficult to meet. When you realize this, you should come up with a new plan to deal with debt. You know that you cannot compromise your home loan payments because you might lose your house in the process. Not only that, if your mortgage ends up being bigger than the actual value of the house, that means you really borrowed too much.
For the past few years, student loans have been making headlines because it keeps on growing and growing. It is starting to pull back the financial growth of young adults. A clear sign that you have a lot of student loans is when you are finding it hard to get a job that is paid enough to help you meet your monthly payments. Now this can be a problem especially when you have mostly Federal student loans. They have very aggressive collection methods that includes wage garnishment – something that they can do even without a court judgement. They can also get your tax refund, Social Security benefits, etc.
In most cases, you are at a disadvantage when you get car loans. The moment you drive off the dealers with your car, it already depreciated on you. In essence, you will always borrow too much with this type of debt. That is why you need to exert caution when you deal with debt from buying a car. The truth is, it is ideal that you pay your car in cash – or at least, save up as much as you can so you can pay in cash. It is how you can keep your losses from being too much.
Now this is the type of debt that you can easily borrow too much of. According to an article published on TheSimpleDollar.com, the average American household owes $15,609 in credit card debt. This data came from the Federal Reserve and only includes households that are indebted. There are two ways to determine if you borrowed too much. The first is when you reach your credit limit. The second is when you can no longer afford to pay the minimum payment requirement. The thing about credit cards is that it makes purchasing convenient. You do not have to reapply for new credit in order to borrow money. As long as you have not reached your credit limit, you can go ahead and continue to use credit to purchase almost anything. That is what makes this debt one of the most dangerous that you can be involved with. It is also notorious for the high interest rate that can ruin your finances quite easily.
What to do when you borrowed more than you can handle
Now that you know the signs that you borrowed too much, it is time to find out how you can resolve this problem. Unless you deal with debt the right way, you will never achieve debt freedom. So here are our tips for the top 4 debts that you borrowed too much of.
We all know that not paying your mortgage would mean losing your home and the equity that you have built upon it. Now the best way to deal with this debt is to reach out to your lender. You need to inform them that certain changes happened to your finances that made it difficult for you to pay off your monthly amortization. Ask them about the options available based on how much you can afford to pay. Among your options would probably include refinancing your loan. The goal here is to get a new loan with better terms, use it to pay the old loan and continue paying the mortgage based on the new terms. The term should ideally have lower interest rates or a longer payment term – anything that will help you reduce the monthly amount that you need to pay.
You have to be careful when you deal with debt owed to the government. Their collection methods are quite aggressive. In case you are in the midst of a financial crisis, you can apply for deferment or forbearance. If you do not qualify for it, you still have other options. When it comes to student loans, an article published on CNBC.com suggested three options that you can pursue.
- Ask for forgiveness. If you work in the public sector or the army, you may be able to qualify for loan forgiveness. You need to check with your loan servicer or lender to find out if you can apply for forgiveness.
- Qualify for a repayment plan. If you current repayment plan is difficult to meet, talk to your loan servicer if you can qualify for other repayment plans. The most common option are income-driven repayment plans. These are dependent on how much you earn each month and your financial position. The monthly amount that you need to pay is usually a percentage of your salary.
- Automate your payments. In most cases, if you automate your student loan payments, you will get a discount. So if you need to lower your monthly payments and if you want to make it convenient, then opt for auto payments.
The best advice when buying a car is to pay for it in cash. If you cannot afford it, then pay at least 20% on the downpayment. You should also try to limit your terms to 4 years or less. You can also be careful with the expenses associated with your car. If you can save on car maintenance costs, it can make your budget more bearable.
To deal with debt borrowed through credit cards, you need to look at options that will give you low interest rates. You can use debt consolidation loan so you can put your balance into a low interest debt. Another option is balance transfer. You can get a 0% credit card, transfer the balance of your high interest cards and then pay off the principal while the 0% introductory period is still in effect. You can always get help by going to a non profit credit counselor. They give free consultations so you can get professional advice for your debt situation.
Here is a video about how a family and their financial struggles. Bryton, the one in the video, married young and she said that before marrying, their parents insisted that they take a Dave Ramsey course that will help them manage their finances. This came at a great time because both she and then fiance did not have any debts yet. So when the time came for them to borrow money, they were very wise about it. Bottom line is, you need to know how to handle your finances because it will not only help you make the right financial decisions. Financial literacy can also get you out of tight spots in case you made the wrong decisions. Watch this video to find out about how their financial knowledge got them through the ups and downs of their personal finances.