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Understanding Debt Problems & Solutions
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The Debt Landscape
• 40% of Americans live on 110% of their income
• Total U.S. household debt = $11.2 trillion
• Finances are one of the top five causes of divorce
• Money used to pay off debt is money that can’t be saved – for retirement, education, or other long term goals
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Debt Dictionary
Debt - Something that you are obligated to give to someone else
Lender – an organization or person who lends money
Borrower- someone who receives something and promises to return it, or pay for it over time
Collateral – tangible item/object pledged for the payment of a loan
2 Types of Debt
Secured = Collateral
• Mortgage
• Auto Loan
• RV
• Boat
Unsecured = No Collateral
• Most Credit Cards
• Signature Loans
• Student Loans
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Common Interest Rates
Credit Card - 18.9%
Signature Loan - 9%
Payday Loan - 300% - 750%
Student Loans - 8%
Auto Loan - 4.3%
Title Loan – 100%
Home Loan - 4.5%
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Not all debt is bad.
but
It can become a problem when it:
• Exceeds your capacity to repay
• Keeps you awake at night
• Causes creditors to call
• Interferes with your life
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Average Spending
38%
16%13%
5%
18%
10%
Housing
Transportation
Food
Debt
Other
Savings
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4 Major Reasons for Debt
• Mortgage
• Auto loan
• Student Loan
• Credit Cards
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Mortgage Debt
• Bad when -- you get “more home” than you can afford.
• Good because –
• a home is also an investment that builds value.
• once it is paid off it’s yours! A mortgage is the best type of debt.
Auto Loan Debt
• Bad Debt – if the interest rate is high and if the loan term is greater than 48 months
• Good Debt – “better debt” with a moderate down payment, loan term of 48 months or less, and pay more than the minimum payment
• Before you buy, consider:• How far and how often do you drive? • How long will your car last?• Your profession
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Auto Loan Example
Car Price: $20,000Down Payment: $500Auto Loan: $19,500Term: 72 Months Interest Rate: 6%Monthly Payment: $323.00Total interest paid = $3,756
Car Price: $20,000Down Payment: $3,500Auto Loan: $16,500Term: 48 MonthsInterest Rate: 6% Monthly Payment: $378.00Total interest paid = $1,644
Student Loan Debt
• Currently at $1.26 trillion
• Increasing at $2,854 per second
• Average debt load $29,400
• 43 million Americans carry student loan debt
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• Good – if your anticipated income will cover your loan payment
• Lowest paying college majors (not in order)• Education• Art • Theater• Photography • Social Work• Theology • Music • Spanish• Hospitality & Tourism • Sociology
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Credit Cards
What are the advantages of credit cards?
• Convenience
• Build credit history
• Create a barrier between merchants and your own money.
• Extended warranties and protections.
• Credit card rewards.
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However…
• Credit cards make it easy for us to spend MORE than we earn.
• Although credit cards can help you establish credit, they have high interest rates.
• In 2012 credit card companies made $43 billion in card fees.
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When should you have a credit card?
• When you need one - for travel, record keeping, etc.
• When you can pay it off in full each month
How do you select a credit card?
• Annual fees
• Monthly fees
• APR
• Rewards
• Acceptance
• Balance transfer fees and rates
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Credit Card Debt
• Is always bad debt.
• U.S consumers hold 1.2 billion credit cards
• Approximately $884 billion in credit card debt
• Average credit card debt = $5,000
• Average interest rate = 14.7%
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Credit Card Debt Example
CREDIT CARD STATEMENT
• Balance: $5,000• Interest: 18.9%• Payment: $65.00
• Payoff Time: 7.5 Years
• Skipped payment in December
• Interest Paid – $3,080
CREDIT CARD STATEMENT
• Balance: $5,000• Interest: 18.9%• Payment: $75.00***Paid $10.00 more a month
• Payoff Time: 5.6 Years
• Did not skip payment in December
• Interest Paid – $2,312
Total Savings of
$768.00
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Debt
1. Home equity loans
2. Credit card advance
3. Gambling
4. Pawn shop loans
5. Payday loans
6. Title loans
7. Borrowing from family
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Possible Debt Solutions
Reverse Mortgage
Debt Settlement
Student Loan Counseling
Debt Management Plan
Bankruptcy
Reverse Mortgage
The Pros:
• Can remain in your home
• No credit check or income requirement
• No monthly payment
• Converts equity into cash
• You have monetary options: monthly payment, lump sum or a combination of both
The Cons:
• You must be 62 years or older
• Must have equity
• Upfront cost is high
• Consumer is responsible for taxes and insurance
• Could impact Medicaid eligibility
Debt Settlement
The Pros:
• Not required to pay the full balance on your unsecured debt
• There are typically payment options
• Debt is paid in 3 to 5 years
The Cons:
• Impacts credit score
• Typically, accounts must be 3 to 6 months delinquent to enter negotiation with creditors
• Creditors can refuse to settle
• Must pay taxes on waived debt more than $600
• Typically, high fees are charged by assisting agencies
• Does not assist with secured or student loan debt
Student Loan Counseling
The Pros:
• Helps determine options
• Income Based Repayment Plans
• Graduate Repayment Plans
• Loan Deferment
• Perkin Loan Rehabilitation
The Cons:
• Interest still accrues while on assist plans
• A large percentage of your payment will go toward interest
• Will extend your loan term
Debt Management Plan
The Pros:
• Repay unsecured debt faster – 5 years or less
• Lower interest rates and get fees waived
• Stop creditor calls
• One monthly payment
• Credit Counseling Agencies do not report to credit bureaus
• Many that offer DMPs are nonprofit agencies
The Cons:
• Does not assist with secured debt
• Some consumers may need more than 5 years
• It is not recommended that you take on any additional debt while on the plan
• Does not assist with student loan debt
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Bankruptcy
The Pros
• There is more than one option
• Will stop creditor calls
• You will be granted debt relief
The Cons
• Impact on credit score
• May have to give up luxury possessions
• Does not assist with student loan debt
• Difficult to get a mortgage loan within the first 5 years
• Chapter 7 remains on credit report 10 years
• May still have to pay back some of your debts
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Digging Out of Debt
• Allen & Gina are fed up with their debt.
• They both work and make good money but are not able to save.
• They have agreed to make necessary changes and take steps to pay off their debt and start saving.
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Essential Steps
1. Gather statements & bills
2. Add up the monthly payments
3. Identify wants vs. needs
4. Analyze the wants – eliminate & cut back
5. Analyze the needs – look at options
• Look at the interest rates
• Payment plans
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How the Flays Spend Their Money
Mortgage/Rent $1,200Car payment $300Insurance $200Student Loans $400Groceries $600Credit Cards $400Medical Bills $110Memberships $ 25Cable & Internet $150Cell Phone $ 75Pedicure $ 40Golf $ 80Morning Coffee $ 80Entertainment $150Shopping $150
Total monthly bills = $3,960
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Separate Wants & Needs
Mortgage/Rent $,1,200Car payment $300Insurance $200Student Loans $400Groceries $600Credit Cards $400Medical Bills $110
Memberships $ 25Cable & Internet $150Cell Phone $ 75Pedicure $ 40Golf $ 80Morning Coffee $ 80Entertainment $150Shopping $150
Needs = $3,210
Wants = $750
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Analyze the Wants
Memberships $ 25
Cable & Internet $150
Cell Phone $ 75
Pedicure $ 40
Golf $ 80
Morning Coffee $ 80
Entertainment $150
Shopping $150
Eliminate some for $295 savings
Cut back on some for $245 savings
$20
$40
$75
$75
Total savings on “wants” = $540
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Analyze the Needs
Mortgage/Rent $1,200
Car payment $300
Insurance $200
Student Loans $400
Groceries $600
Credit Cards $400
Medical Bills $110
For mortgage & car, look at refinancingif interest rate is too high.
Check for lower rates with other providers.
Get Student Loan counseling to explore payment options & consolidation
Bargain shop and use coupons
0% interest – keep paying on time and extra if possible
In-depth analysis
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A Closer Look at Credit Cards
Credit Card balances & interest
• $7,200.00 Interest 18.9%
• $2,500.00 Interest 21.9%
• $3,000.00 Interest 19%
• $1,300.00 Interest 0%
• $2,000.00 Interest 24.5%
Total credit card debt – $16,000
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Which should the Flays tackle first?
The Flays have $540.00 extra due to reducing and eliminating the “wants”.
• $7,200.00 Interest 18.9% $120.00/mo
• $2,500.00 Interest 21.9% $ 60.00/mo
• $3,000.00 Interest 19% $ 70.00/mo
• $1,300.00 Interest 0% $ 60.00/mo
• $2,000.00 Interest 24.5% $ 90.00/mo
TOTAL $ 400.00/mo
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The Debt Waterfall
The Debt Waterfall is a personal debt reduction method to help you become debt free.
Once you pay off a bill such as a credit card, you apply that payment to other existing debt.
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Debt Waterfall ExampleCredit card payment $50.00
Auto loan payment $200.00
Medical care $100.00
Mortgage payment $1,000.00
• Once your credit card is paid in full, apply the $50.00 to your auto loan. You would then be paying $250.00.
• Once your auto loan is paid in full, apply the $250.00 to your medical care payment. You would then be paying $350.00.
• Once your medical care payment is paid in full, apply the $350.00 to your mortgage, and you would be paying $1,350.00.
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Other Options for the Flays
• Could they negotiate for lower interest rates on their credit cards?
• Could they consolidate 2 or more credit cards together at a lower interest rate?
• Can they do a balance transfer to a personal loan with a lower rate?
• Could they refinance their home and lower their monthly payments?
• Can they refinance their automobile?
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Lessons Learned!
• Remember what got you into debt in the first place.
• Don’t be a repeat offender. Many consumers file for bankruptcy, debt settlement and debt management plans more than once.
• Stay debt free and happy!
Call: 866-750-9612
Take Charge America is a non-profit financial education and credit counseling organization. We are dedicated to helping people nationwide improve their financial futures through educational outreach, credit counseling and debt management solutions.