You know you’re in debt and that it’s becoming a serious problem. You may be having a hard time making just the minimum monthly payments on your credit card debts. Or, worse yet, maybe you’re not able to make even those payments.
Your debt to earnings ratio
You can actually determine how seriously you are a debt by calculating your debt to earnings ratio. This is a fairly simple calculation. First, add up all of your earnings such as your salary, any income you have from a second job or from any other source. Next, add up all your “recurring” debts. These are those debts you have to pay every month, which typically would be your mortgage payment or rent, student loans, personal loans, auto loans, and so forth. Now, divide these debts into your monthly earnings. This will yield a percentage. If you find that yours is 50% or higher, you are in trouble and need to take immediate action.
What your debt is costing you
Maybe you don’t really want to know this but you can determine how much your debt is really costing you. There are calculators available online that can show you this very quickly. However, you could do this yourself.
First, list the total amount of money that you owe. This is known as the principal value of your debt and it is the amount on which you’re paying interest. Second, write down the interest rates you’re paying on your debts. If you have multiple debts at different interest rates, you’ll need to add them up and then divide by the number of your debts to get an average interest rate.
Next, multiply that interest rate by the amount of your principal. If you owe $15,000 multiply this by 18% (your average interest rate. Assuming a monthly payment of $380.90, the total cost of your debt will be $22,854 or $7854 more than your actual debt.
What to do about big debt
If you find you have a debt to earnings ratio of 50% or higher or if you just feel sick at the idea of paying $5,000, $7000 or more as the cost of your debt, there are things you can do about it. Many families have chosen a debt consolidation loan as a way to better manage their debt. Of course, to do this you’ll need to be able to borrow enough to pay off your existing debts. For example, if you did owe that $15,000, you would have to be in a position where you could borrow $15,000, which might not be easy. Many bankers are not anxious to lend a large amount of money to people who are already having a problem with debt.
The good and bad of a debt consolidation loan
A debt consolidation loan can be a good solution because, as the name implies, it offers the opportunity to consolidate all of your debts into a new loan that will require just one monthly payment. Your payment should be much lower than the sum of the monthly payments you’ve been making and it should have a lower interest rate. If you’re typical, you’ve probably paying 18% or even more on your current debts. In comparison, you should be able to get a debt consolidation loan at 5% or even better.
A debt consolidation loan does come with some negatives. It will probably take you seven to 10 years to pay it off, and will end up costing you more than if you simply paid off your debts in three to four years. Also, you will have to be very careful about not taking on any new revolving credit during those years or you could end up back in trouble.
A better option
We’ve helped more than 100,000 families get out of bed utilizing an option called debt settlement. We have saved these families thousands of dollars each and helped them become debt free in 24 to 48 months. You can get more information by calling our toll-free number. We would be happy to explain how debt settlement works and how it could help you.