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Exploring Debt Options

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Exploring Debt Options Understanding Debt Problems & Solutions The Debt Landscape www.TakeChargeAmerica.or • 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 g Debt Dictionary www.TakeChargeAmerica.or Debt - Something that you are obligated to give to someone else Lender – an organization or person who lends money g 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 www.TakeChargeAmerica.or Secured = Collateral Unsecured = No g • Mortgage Collateral • Auto Loan • Most Credit Cards • RV • Signature Loans • Boat • Student Loans Common Interest Rates www.TakeChargeAmerica.or Credit Card - 18.9% Signature Loan - 9% Payday Loan - 300% - 750% Student Loans - 8% Auto Loan - 4.3% Title Loan – 100% g Home Loan - 4.5% Not all debt is bad. www.TakeChargeAmerica.or but It can become a problem when it: • Exceeds your capacity to repay • Keeps you awake at night • Causes creditors to call g • Interferes with your life Average Spending www.TakeChargeAmerica.or 10% Housing 18% 38% Transportation Food Debt g Other 5% Savings 13% 16% 4 Major Reasons for Debt www.TakeChargeAmerica.or • Mortgage • Auto loan • Student Loan • Credit Cards g Mortgage Debt www.TakeChargeAmerica.or • 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 g mortgage is the best type of debt. Auto Loan Debt www.TakeChargeAmerica.or • 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 g 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 Auto Loan Example www.TakeChargeAmerica.or Car Price: $20,000 Car Price: $20,000 Down Payment: $500 Down Payment: $3,500 Auto Loan: $19,500 Auto Loan: $16,500 Term: 72 Months Term: 48 Months Interest Rate: 6% Interest Rate: 6% Monthly Payment: $323.00 Monthly Payment: $378.00 Total interest paid = $3,756 Total interest paid = $1,644 g Student Loan Debt www.TakeChargeAmerica.or • Currently at $1.26 trillion • Increasing at $2,854 per second g • Average debt load $29,400 • 43 million Americans carry student loan debt • Good – if your anticipated income will cover your www.TakeChargeAmerica.or loan payment • Lowest paying college majors (not in order) • Education • Art • Theater • Photography • Social Work • Theology • Music g • Spanish • Hospitality & Tourism • Sociology Credit Cards www.TakeChargeAmerica.or What are the advantages of credit cards? • Convenience • Build credit history • Create a barrier between merchants and your own g money. • Extended warranties and protections. • Credit card rewards. www.TakeChargeAmerica.or However… • Credit cards make it easy for us to spend MORE than we earn. g • Although credit cards can help you establish credit, they have high interest rates. • In 2012 credit card companies made $43 billion in card fees. When should you have a credit card? www.TakeChargeAmerica.or • 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 g • Rewards • Acceptance • Balance transfer fees and rates Credit Card Debt www.TakeChargeAmerica.or • 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% g Credit Card Debt Example www.TakeChargeAmerica.or CREDIT CARD CREDIT CARD STATEMENT STATEMENT • Balance: $5,000 • Balance: $5,000 • Interest: 18.9% • Interest: 18.9% • Payment: $75.00 • Payment: $65.00 ***Paid $10.00 more a month • Payoff Time: 7.5 Years • Payoff Time: 5.6 Years g • Skipped payment in December • Did not skip payment in December • Interest Paid – $3,080 • Interest Paid – $2,312 Total Savings of $768.00 The Wrong Way to Get Out of Debt www.TakeChargeAmerica.or 1. Home equity loans 2. Credit card advance 3. Gambling 4. Pawn shop loans 5. Payday loans 6. Title loans g 7. Borrowing from family Possible Debt Solutions www.TakeChargeAmerica.or Reverse Mortgage Debt Settlement Student Loan Counseling Debt Management Plan Bankruptcy g Reverse Mortgage The Pros: The Cons: • Can remain in your home • You must be 62 years or • No credit check or income older requirement • Must have equity • No monthly payment • Upfront cost is high • Converts equity into cash • Consumer is responsible for • You have monetary taxes and insurance options: monthly payment, • Could impact Medicaid lump sum or a combination eligibility of both Debt Settlement The Pros: The Cons: • Not required to pay the • Impacts credit score full balance on your • Typically, accounts must be 3 to unsecured debt 6 months delinquent to enter • There are typically negotiation with creditors payment options • Creditors can refuse to settle • Debt is paid in 3 to 5 • Must pay taxes on waived debt years 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: The Cons: • Helps determine options • Interest still accrues while • Income Based on assist plans Repayment Plans • A large percentage of your • Graduate Repayment payment will go toward Plans interest • Loan Deferment • Will extend your loan term • Perkin Loan Rehabilitation Debt Management Plan www.TakeChargeAmerica.or The Pros: The Cons: • Repay unsecured debt • Does not assist with faster – 5 years or less secured debt • Lower interest rates and • Some consumers may need get fees waived more than 5 years • Stop creditor calls • It is not recommended that • One monthly payment you take on any additional debt while on the plan g • Credit Counseling Agencies do not report to credit • Does not assist with bureaus student loan debt • Many that offer DMPs are nonprofit agencies Bankruptcy www.TakeChargeAmerica.or The Pros The Cons • There is more than one • Impact on credit score option • May have to give up luxury • Will stop creditor calls possessions • You will be granted debt • Does not assist with student relief loan debt • Difficult to get a mortgage loan g within the first 5 years • Chapter 7 remains on credit report 10 years • May still have to pay back some of your debts Case Study: Digging Out of Debt www.TakeChargeAmerica.or • 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. g Essential Steps www.TakeChargeAmerica.or 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 g • Payment plans How the Flays Spend Their Money www.TakeChargeAmerica.or Mortgage/Rent $1,200 Car payment $300 Insurance $200 Student Loans $400 Groceries $600 Credit Cards $400 Medical Bills $110 Total monthly bills = $3,960 Memberships $ 25 Cable & Internet $150 Cell Phone $ 75 g Pedicure $ 40 Golf $ 80 Morning Coffee $ 80 Entertainment $150 Shopping $150 Separate Wants & Needs www.TakeChargeAmerica.or Mortgage/Rent $,1,200 Car payment $300 Insurance $200 Student Loans $400 Needs = $3,210 Groceries $600 Credit Cards $400 Medical Bills $110 Memberships $ 25 Cable & Internet $150 g Cell Phone $ 75 Pedicure $ 40 Wants = $750 Golf $ 80 Morning Coffee $ 80 Entertainment $150 Shopping $150 Analyze the Wants www.TakeChargeAmerica.or Memberships $ 25 Cable & Internet $150 Cell Phone $ 75 $20 Eliminate some for Pedicure $ 40 $295 savings Golf $ 80 $40 Morning Coffee $ 80 Cut back on some for $245 savings g Entertainment $150 $75 Shopping $150 $75 Total savings on “wants” = $540 Analyze the Needs www.TakeChargeAmerica.or Mortgage/Rent $1,200 For mortgage & car, look at refinancing if interest rate is too high. Car payment $300 Check for lower rates with Insurance $200 other providers. Student Loans $400 Get Student Loan counseling to explore payment options & consolidation g Groceries $600 Bargain shop and use coupons Credit Cards $400 In-depth analysis Medical Bills $110 0% interest – keep paying on time and extra if possible A Closer Look at Credit Cards www.TakeChargeAmerica.or Total credit card debt – $16,000 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% g • $2,000.00 Interest 24.5% Which should the Flays tackle first? www.TakeChargeAmerica.or 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 g • $2,000.00 Interest 24.5% $ 90.00/mo TOTAL $ 400.00/mo The Debt Waterfall www.TakeChargeAmerica.or 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. g Debt Waterfall Example www.TakeChargeAmerica.or Credit 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.
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