The Only Debt Management Plan You'll Ever Need
Total consumer debt in the US stands at $16.38 trillion in 2022. This includes mortgages, auto loans, credit cards, and student loans. Today, 70 percent of Americans with credit card debt admit that they cannot pay it off this year. Over the past few years, there has been consistent growth in several areas of debt as more people turn to debt financing in order to meet their financial needs.
While an increase in home and student loans can be a good thing, it is the statistic on the number of people who are unable to meet their debt obligations that is worrying. This is an indication that consumers need to adopt healthy financial habits and learn effective ways of managing debt.
Due to economic, career, and personal factors, getting into debt is inevitable for a good number of people. Although not all debt is bad, it is important for consumers to be aware of warning signs of debt problems. If you find yourself in a situation where you have difficulty meeting simple financial obligations, you live paycheck to paycheck, you do not know the balances of your bank accounts, or you are overworking while under-earning, you may want to consider making changes to your financial habits and seeking debt-free living. Below is information to help you choose a debt management plan that will work for you.
What is Debt?
To have a proper debt management plan in place, it is important to understand debt. This will help you in determining whether you are in debt as well as the amount of debt you owe. There are many definitions of debt, with some forms of debt, including an obligation to pay money, deliver goods, or provide a service under a certain agreement.
At its simplest, debt is money owed by one party, the borrower, to a second party, the lender. Unlike an immediate purchase, debt is a deferred payment that is owed in the future. A good number of individuals and corporations use debt as a method to finance large purchases that they would not normally afford. Most debt agreements give the borrower or debtor permission to obtain money from the creditor under the condition that they will pay back the principal plus accrued interest at a later date.
Whether the debt you take on will be a useful financial tool or a baggage that will complicate your life will depend on how you handle it. The amount of debt you have will also determine how it will affect your life. This is why it is important to learn the different ways of handling your debt. The manner in which you approach debt will be influenced by the type of debt you owe. However, you should use a debt repayment calculator to determine your debt service to ensure you will cover your monthly payments comfortably.
Good vs. Bad Debt
When it comes to debt financing, there are two types of debt that you are likely to encounter. Before taking on debt, you should take time to determine whether it is good or bad debt. In case you are already in debt, knowing the type of debt you owe will make it easy for you to come up with a great debt management plan.
Good Debt
Good debts allow you to manage your finances better, buy things you need, leverage your wealth, and be in a position to handle unforeseen emergencies. Debt is considered to be a good investment if you used the funds to purchase items that increase in value or contribute to your financial health. Some examples of good debt are home loans, student loans, and loans taken to start a business.
Bad Debt
Bad debt, on the other hand, is money that you borrow to buy depreciating assets or for consumption. This money does not go up in value over time and does not help you generate income. In short, bad debt works against you from the onset and could create an unhealthy financial situation. Examples of bad debt include loans to buy a new car, borrowing to spend on consumables, credit card debt, and debt used to finance a vacation.
While good debt can help you achieve your financial goals, you should remember that too much of any kind of debt will hurt your financial health. Apart from the proper management of the borrowed funds, consumers should ensure that they are able to pay back the debt without straining too much financially. Some of the factors you should be mindful of are the amount of debt, the interest rate, other fees, and charges as well as the repayment period. You may also want to calculate your monthly debt service to determine whether your income will cover the repayments.
The Main Categories of Debt
Considering that you will turn to debt financing to enable you to handle a financial emergency or make a large purchase, debt free living is almost impossible. In order to avoid getting into financial trouble, you should have a debt management plan. This is why consumers should be familiar with these main categories of debt.
Secured Debt
This type of debt is backed by an asset as collateral. Although the lender can repossess and sell the asset in case you are unable to repay the loan, they will still look at your credit report to determine how responsibly you handle debt. Most secured loans have reasonable interest rates, depending on the borrower's creditworthiness and the value of the collateral.
Unsecured Debt
Unsecured debt does not require you to put up any form of collateral. This means that the lender gives you the loan on faith in your ability and your promise to repay it. Although there is no asset that can be repossessed and sold in the event that you default on the loan, you are still bound by a contractual agreement. This means that the lender can sue to reclaim the money owed to them, especially if it is a loan with a high interest rate.
Revolving Debt
With revolving debt, there is an agreement between the borrower and the lender that allows the consumer to borrow up to a set maximum limit recurrently. The payment amounts from the consumer will depend on the current amount of the loan. Revolving debt can either be secured or unsecured depending on the type of loan.
Mortgages
These are, perhaps the most common and largest debt that consumers carry. Mortgages are loans whose proceeds consumers use to purchase homes, with the subject property serving as collateral. Generally, mortgages have lower interest rates than other types of consumer loans. In order to keep the monthly payments affordable for homeowners, mortgages tend to have 15 to 30-year terms.
A clear understanding of the different categories of debt and their characteristics will help you come up with a debt management plan. Delayed or missed payments on loans can not only affect your credit score but also lead to higher interest and penalties. By managing debt properly, you will be in a better position to avoid these situations as well as the associated stress.
Reasons to Go into Debt
There are times when debt financing makes sense and can help improve your financial health. When you are borrowing to invest in making future income, build an asset base that will help you in the future, or increase your net worth, it can be considered responsible for incurring debt. However, you should still have a debt management plan for reducing and ultimately getting rid of the debt.
Educational Loans
Although a degree is no longer a pre-requisite for success, it pays to invest in education. Whether you are investing in your kids' or your own education, a worthwhile college experience will play an important part in helping launch your career. This makes taking out an educational loan a good reason to incur debt.
Home Loans
There are many reasons why consumers take out home loans. These include buying a place to live in and applying for mortgages for investment properties. Properties will usually increase in value over time while investing in tangible real estate will offer a source of income. These two types of investment will have a positive impact on your financial situation.
Business Loans
Another good reason to take on debt is to get funds to start up or expand a business. Whether you need money for more office space or as working capital, clever use of loans will ensure that you pay a manageable amount every month. If your business grows and succeeds, you will have increased your income.
Debt Consolidation
If you are taking on debt in order to pay off several debts and enjoy better terms, this can make for responsible borrowing. Consolidating debt lets you focus on repaying a single loan, allowing you to plan better.
Loans For Medical Expenses
Consumers also take out loans to enable them to handle medical emergencies. Provided you are in a position to afford the loan and make all payments on time, you can use a medical loan to cover the cost of healthcare.
Home Improvement Loans
Borrowing to finance certain home improvements can make for a smart move. However, the improvements should make the property more functional and add value to your home in the long term. Some people take out home improvement loans to help them remodel their home before putting it up for sale. A debt repayment calculator will help you determine whether you can afford the monthly repayments.
6 Things You Should Know about Debt
Whether you are a student, employed, freelancer, or in business, it is essential that you manage your money. This will help you avoid getting into debt and make it easy to handle debt that you have already accrued. In addition to having a debt management plan, here are a few things to know about debt.
Some Debts Will Affect Your Credit Rating
Some types of loans can have serious consequences if you do not pay them back in time. This is why it is important to understand the financial commitment you are getting into before taking on debt. You should ensure that all debts are paid on time.
Minimum Repayments Will Not Pay off Your Debt
While minimum payments will cover the interest, it will not have a significant effect when it comes to reducing the loan balance. This can see you paying interest without clearing the loan balance.
Overdrafts Are Not Free Money
A good number of people get carried away when they receive an overdraft facility. You should always remember that the money has to be paid back, making it important to look at the loan amount and the interest charged.
Keep Track of Your Spending
This point cannot be emphasized enough. One of the best ways to avoid and manage debt is by controlling spending. Being familiar with your income and outgoings makes it easier to stop spending on unnecessary things so you can pay off small debts.
Not All Debts Are Equal
It is clear that debt comes in different forms and sizes. If you want to manage debt properly, you should prioritize those that need to be paid off first. For instance, failure to pay rent could lead to eviction while not paying utility bills will see you being cut off. Consider the consequences of not paying when prioritizing debt.
Seek Debt Advice When in Trouble
If you are struggling with debt, you should consider seeking debt advice. An expert will help you plan your finances, allowing you to meet your monthly debt service so you can reduce debt and get out of it in the end.
Common Debt Mistakes to Avoid
If you are to achieve debt free living, you should have and stick to a proper debt management plan. At the same time, you should avoid the common debt mistakes that most consumers make. This will help you to get out of debt faster keep you from getting deeper into debt.
Not Having a Payoff Plan
One of the most important things to think about when taking on debt is how you are going to pay back the money. A payoff plan should define the debt you want to payoff first, how much you will devote to debt repayment, and the amount you owe in total.
Not Having an Emergency Fund
While you may want to devote every single cent to debt repayment, it is necessary to have an emergency fund. Setting aside some money for emergency purposes will ensure you don't have to borrow when a problem requires you to spend. In this way, you will keep reducing the current debt.
One of the best ways to do this is to open a savings account just for this purpose. Below, we listed out some of the best options on the market for you to choose from:
Not Tracking Your Progress
There are two main reasons why you should track your progress regularly. Monitoring your debt repayment efforts will keep you motivated and help you determine if you are making enough progress. This will make you work harder and dedicate extra cash to debt repayment.
Accumulate More Debt
Paying off debt while at the same time, borrowing more may not produce the results you expect. Whenever possible, you should stop borrowing in order to realize progress. You should incur additional debt only when it is absolutely necessary.
Making Late Payments
Missing a deadline on a bill can sometimes carry with it serious consequences. In the case of late-payment penalties or additional interest, it will be harder for you to reduce and eliminate debt.
Following a debt management plan, faithfully, is not an easy undertaking. However, the rewards of less stress and more financial stability make it well worth it.
Debt Management Plan
Debt such as mortgages, student loans, and loans to start a business can help build your financial health. However, if you take on too much debt, you may find yourself in significant financial problems. A debt repayment calculator will help you know how much you are expected to pay the lender back every month, allowing you to determine whether you can afford the loan.
Unfortunately, there are times when your employer may either reduce your hours or lay you off, making it difficult for you to meet your debt obligations. In the event that you find yourself struggling to repay debt, you should consider initiating a debt management plan.
Simply put, a debt management plan refers to an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. Debt management plans are generally meant for people who are deeply in debt and need help getting a handle on it. The plans help borrowers to not only get out of debt but also rebuild their credit. People also learn how to manage their money better so they can avoid getting into the same situation in the future.
Debt management plans are used on non-priority debts such as personal loans, overdrafts, bank loans, credit card debt, and money borrowed from friends and family. It is important to note that the plans cannot be used to help pay off priority debts such as court fines, child support, and maintenance, mortgage, and loans secured against your home or hire purchase agreements.
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Pros and Cons of a Debt Management Plan
Although a debt management plan can help borrowers struggling with debt problems to find relief, it is important to know the upsides and downsides to it before initiating it. This will allow you to make an informed and conscious decision that will help you in the future.
Reduced Interest Rates
Your credit counselor will try to negotiate lower interest rates on your behalf so you can pay back your loans without much difficulty.
Reduced Monthly Payments
As a result of lower interest rates, there is a good chance your monthly debt service will also reduce. Instead of worrying about multiple payments, you will be able to focus on one monthly payment for your unsecured debts.
Debt Is Repaid Faster and in Full
The negotiated terms and lower interest rates make it possible for many borrowers to pay their debts in three to five years.
Less Negative Credit Impact
Compared to settlement, debt management plans have a less negative impact on your credit report and score. This makes it easy to borrow in the future.
Helps You Stay More Organized
Apart from making it easy to reduce debt, these plans also help consumers to be more organized and punctual with their bills.
Peace of Mind
In case you had creditors and debt collectors calling you, this plan will ensure they have an incentive to stop calling.
For all the advantages that a debt management plan may have, it is not without some downsides.
Here are some disadvantages to know about.
Some Creditors Do not Participate
Some credits will not take part in a debt management plan. Others may also refuse to adjust the terms or interest charged on the loans.
You May not Take on Additional Debt
In most cases, borrowers will not be able to take on more debt while on this program.
You Must Make Consistent Payments
To keep enjoying the benefits offered under this program, you will have to make your monthly payments consistently.
In the end, you should find the debt management plan that works for you to ensure you benefit from the program.
Debt Reduction Methods
Debt financing can help you achieve your goals. However, if you find yourself unable to pay your debt, you should consider various debt reduction strategies before turning to a debt management plan.
Snowball method: This debt reduction strategy has a simple basic premise: start by paying off smallest debt then work up to the larger ones. Make a list of all your debts from the smallest to the largest without worrying about the interest charged on them. Pay as much as you can on the smallest while maintaining minimum payments on the rest.
Avalanche method: Make a list of all debts from the highest interest rate to the lowest. Pay the minimum payment on all debts but the one with the highest interest rate. Here, you should contribute as much as you can every month.
Debt tsunami method: While most experts will advise against involving your emotions in matters debt reduction, this strategy encourages you to pay off the debts with the greatest psychological weight first. Do not worry about the amount owed or applicable interest rates.
Balance transfer credit cards: If you have accumulated debt across several credit cards and are struggling to pay, this method can work for you. It involved consolidating the debt into one card so you can bring the debt under control.
It is important to choose the best strategy for your financial circumstances. With the benefits associated with debt free living, you should strive to maintain debt at manageable levels.
Tips for Eliminating Debt Quickly
As much as a debt management plan can help you get out of debt when struggling with payments, there are other options you should consider before signing up for the program. Here are a few tips to help you eliminate debt quickly.
Know Your Debt
The first step when it comes to reducing debt involves knowing the total amount you owe. Create a list of the various debts you owe, including the interest rates, balance, and monthly payments in order to have a complete picture of the situation.
Pay More than the Minimum Payment
When working on your payoff plan, you should ensure that you pay more than the minimum payment. Regardless of the type of debt you owe, this will reduce the principal loan amount significantly.
Know Your Why
Getting out of debt requires a great deal of sacrifice, making it important to remind yourself of why you are working towards debt free living. Keep both your short-term and long-term goals in mind so you can stick to the plan.
Create a Budget
The importance of creating a budget cannot be denied. A good budget will help you keep track of both income and expenses, allowing you to cut down on unnecessary expenditure. In the end, you will channel more money towards debt repayment.
Increase Your Income
If you are keen on eliminating debt quickly, you should find ways of making more money. Getting a second part-time job, starting a side hustle, or freelance work will go a long way in increasing the amount of money you have for monthly debt service.
Drop Expensive Habits
Expensive habits can significantly reduce the amount of money you have left after every paycheck. Doing away with these habits will put you in a better position to pay off debts quickly without straining financially.
Consider Debt Consolidation
Depending on the terms and interest rates you get on your new loan, debt consolidation can help you get out of debt fast. Be sure to use a debt repayment calculator to determine if you can afford the monthly repayments.
Final Thoughts
There is no doubt that debt free living is a wonderful goal. However, it takes commitment, dedication, and sacrifice to achieve this goal. Proper financial management can help consumers to avoid initiating a debt management plan. This includes taking time to shop around for loans before choosing the lender to work with. The next time you need debt financing, kindly consider working with us. We make it easy for consumers to find lenders quickly and conveniently.