None of us enjoy taking on debt, yet nowadays most of us are dealing with it in some form. While good standing debt can be a positive influence on your credit score, the issue that tends to arise is having too much debt. What do we do then? How do we manage when the payments start to feel overwhelming? Since disappearing to live off the grid in the wilderness isn’t a realistic option, there are a few ways to get your debt under control so you can breathe easier when the due date for your bills comes around.
First step is knowing what types of loans you have. Are they secured loans, or unsecured? If you’re unsure, the answer is simple. If there is collateral, or an asset, attached to the loan it is a secured loan. Unsecured simply means there is no collateral at all. To learn more about the types of debt and the ways to manage them, keep reading.
Secured Debt
Mortgages, auto loans and secured credit cards all have a type of collateral attached making them great examples of secured loans. These types of loans are usually viewed as lower risk for lenders due to the assigned collateral. Collateral can also mean you have access to a better interest rate, but if you default, you will lose the pledged collateral. There may be other consequences like fees or penalties, yet those consequences can seem minimal compared to possibly losing your home or vehicle over non-payment.
Secured debt can be considered a ‘priority debt’ due to the collateral attached, so many suggest that you try to pay off these loans first or put more effort into ensuring you’re making at least the minimal payment.
If you can’t afford the payments on a secured debt, ALWAYS speak to your lender first. Many lenders will work with you and may be able to lower the payment amount for a while until you are able to get back on your feet. Another option is to consider selling the collateral attached to the loan, then paying off the loan with the funds from the sale. You must speak to your lender before selling any collateral, but in doing this, you’ll be reducing your monthly bills, as well as the amount of your overall debt.
Unsecured Debt
Traditional credit cards, personal loans, student loans and medical bills are all different examples of unsecured debt. There’s no collateral attached to these types of loans, so if you default the consequences can differ a little from secured debt like larger fees and penalties, along with the chance these debts may end up going to collections.
If you’re unable to make the minimum payments for unsecured loans, a debt consolidation may help reduce your payments to a single, lower interest payment to ease your financial burden. There are also debt relief options like debt management and settlements to help clear this type of debt faster. These options aren’t available for secured loans.
If possible, avoid filing for bankruptcy. Within a bankruptcy, priority debts like taxes or child support are paid first. If there’s anything left over it would go towards your unsecured loans, but there’s no guarantee the funds would cover the cost of those or that you could get them fully discharged. In the case of student loan debt, a separate lawsuit would be filed for student loans since they are rarely discharged through bankruptcy.
Paying Off Your Debts
For both types of debts, the steps to a final pay off can be similar. The Consumer Financial Protection Bureau (CFPB) offers two methods you might consider using to pay off your debt.
Snowball Method
The snowball method involves paying off your smallest debt first. Make a list of ALL your secured and unsecured debt and order them lowest to highest based on how much you owe. For each debt besides the smallest one, make the minimum payment. Then put any additional money in your budget towards the smallest. Once that loan is settled, start the method again with the next smallest debt.
Avalanche Method
The CFPB also refers to this method as the ‘highest interest rate method’. This one is generally the most well-known and involves paying off your highest interest loan first. Instead of organizing your debts from the amount you owe you’ll organize them by interest rate. Once again, you’ll pay the minimum payment on the rest of your debts, but for the highest interest loan you’ll put any extra money from your budget towards that one. Once that debt is paid off in full, start this method again with the next highest interest loan.
Debt affects us all no matter who we are or where we live. Sometimes it can be a struggle to make ends meet and you may feel overwhelmed and unsure where to start. If you’re uncertain on how to manage your debt and at a loss at how to move forward, reach out to one of our certified staff at Dakotaland Federal Credit Union. You are not alone; our Financial Counselors are trained to help, and your success is our success …Together Strong!
