Debt can take over your life if you’re not careful and make it difficult to think about much else. You may not know what to do first — especially with the phone ringing and letters coming in from the companies you owe money to. No debt problem is unsolvable. Take a breath and work through these four steps before you do anything else:
- Assess your debt. Take a step back and figure out how much you owe. Add up the balances on your cards and any loans. Determine an amount that you’ll be able to set aside to pay down these balances. Doing this will broaden your perspective on your situation.
- Choose your priority debts. When you have many small debts, it’s tough to know where to start. A “quick win” is paying off your smallest debts first, which can boost your mood and get the ball rolling. From there you can prioritize debts with high interest rates to prevent your balances from growing too fast.
- Make a plan. With a better handle on what you owe and can pay, work out a clear path to get out of debt for good. The size of your debt will affect how you pay it back, so plan your debt management strategy wisely.
- Seek expert advice. Consider working with a credit counseling organization. Reputable nonprofits can recommend ways to work out a budget and often offer free materials and workshops to help you manage your finances for the long term.
While any debt is tough, lower amounts are easier to manage. That said, you’ll want to prevent your debt from growing. Hardly anyone starts out owing hundreds of thousands of dollars. Most unmanageable debts build over time, made up of little emergencies or unexpected bills. Given the amount of your debt, you may be able to talk with your family or friends about borrowing the money.
Carefully decide on the parameters of your loan. How much you’ll borrow, how long you’ll need to repay that amount and whether you’ll include interest are all important things to consider. You may be surprised at how willing your loved ones will be to support you in eliminating your debt.
The Internet has opened up new ways to make a little extra cash — and we’re not just talking about eBay. Upwork, Taskrabbit and Fiverr are sites that match your skills or services to people who need help. Projects vary from writing and proofreading to picking up a family’s groceries. While it’s not an easy decision, you may have books, toys, gym equipment or other items you no longer need that you could sell online.
A payday loan, small loan or cash advance loan may be a viable option when you can pay off the amount in one or two months. These are typically short-term unsecured loans that allow you to access the money you need quickly and easily. You must have payroll and employment records to apply, and interest rates are determined by the state in which you live — some as high as 400%!
Simple ways to further save money could be right under your nose. Review your monthly expenses — electricity, cable, cellphone and Internet bills — and then call each of your providers to ask about offers you may be eligible for. Merely mentioning that you’re interested in switching to a competitor can result in savings. While there’s only so much you can do about groceries, consider joining a wholesale club like Costco or Sam’s Club. You’ll pay a $45 to $60 membership fee upfront, but if you have a large family or even the extra room, you could save on food, household supplies and seasonal items.
Can I get a loan if I’m receiving social assistance?
This amount of debt takes a little longer to clear, but it’s still worth making a game plan. Not keeping track of how much you owe can cause high interest rates to push your debt even higher. When the money you owe is split between many companies, it’s easy to become overwhelmed. Consider merging your medium-sized debts into one manageable chunk with lower monthly payments. This means you owe money to just one lender — and no more figuring out who to pay first.
Balance transfer credit cards give you the opportunity to pay your debts off quickly, provided you do so in the introductory period. Many cards offer between 6 and 21 months of no interest as an incentive to clear your debt. You could be hit with high APRs later on, so be careful about how you approach these as a solution. Paying no interest will save you a lot of money, but be certain that you can pay off the balance within the time limit.
Compare balance transfer credit cards
For this level of debt, you could still qualify for a balance transfer credit card. But you’re not limited to just credit card transfers. You can also consider a debt consolidation loan. Similar to a balance transfer credit card, a debt consolidation loan merges all your debts into a more manageable monthly lump sum that’s only payable to one lender.
Unlike balance transfer credit cards, a consolidation loan is a long-term option. It won’t come with 0% APR intro periods, but the interest will be lower than the revert rate of a balance transfer credit card — and far lower than paying several interest rates to different lenders.
The two types of debt consolidation loans are unsecured and secured. An unsecured loan means the lender has no right to claim your financial assets upon a missed payment. However, the loan may not be big enough to cover your debts. The loan amount depends on the amount of risk the lender is willing to take.
A bigger loan means a bigger risk to the lender, and you’ll need to “secure” the loan by putting down collateral. With a secured loan, you agree that the lender can take your collateral — typically your house or car — upon failure to repay the loan. This is a situation you don’t want to be in, so consider your options and read the details of your loan terms carefully. You may not get a lower interest rate than you were paying before, and there may be penalties for early repayment. Compare consolidation loans to find one that’s best for you.
Another option is a debt management company. Debt consolidation and debt management are similar, but there’s a crucial difference: With debt management, you authorize a third party to pay your debts on your behalf. These companies — often for a fee — offer to negotiate lower payments and interest with your creditors and “manage” your debt by distributing a monthly payment from you among those you owe money to.
There are drawbacks to using a debt management company, including high fees and possible dings to your credit score. Confirm that any company you’re considering is reputable by reading reviews, especially those with the Better Business Bureau.
Debt relief services
A larger debt is more difficult to pay off, but there’s good news: With pro-level organizational skills and motivation, you have options. First, consider negotiating your debt with your creditors. When you call and explain your difficulties, they may be able to help by lowering your monthly repayments.
They want to keep you as a customer, after all. Consider seeking the advice of a credit counseling organization. A reputable debt counselor can help you plan a budget and create habits to manage your finances beyond your debt.
Homeowners with a mortgage may be able to explore taking out a home equity line of credit (HELOC). Also called a second mortgage, a HELOC uses your home equity as collateral. Because real estate prices generally rise with time, your house will likely appreciate in value while you pay off your mortgage’s principal.
The difference between what your house was worth when you bought it and what it’s worth now — your equity — is an amount that you can borrow against. Lenders may be willing to allow you to borrow anywhere from 60% to 80% of your equity.
If you bought your house for $160,000 and it’s now worth $250,000, you have $90,000 in equity. You might be able to secure a loan for roughly $54,000 to $72,000 — which is money you can apply toward your debt. Of course, being unable to repay the HELOC will put your home at risk. This type of loan also comes with appraisal, administration and legal fees among other costs, so compare your options before applying.
As an absolute last resort, you might want to consider using a debt relief service to negotiate with your creditors for you — or file for bankruptcy. Debt relief can help you cut what you owe in half, but often comes with relatively high fees. It’s also important to note that any settled debt is considered taxable income, so your savings might not be as large as you expect.
Your ability to successfully get out of debt is largely dependent on your ability to plan, make reasonable goals for yourself, compare your options and follow through. Breaking up the process into smaller, more manageable tasks can help ease the overwhelming nature of the mission.
Examine your options carefully and make sure you have a contingency plan in the event that things go off course. Prepare for this chapter of your financial journey, and walk boldly toward a better debt-free future.Back to top