Consumer or personal debt happens when you borrow money from another. The debt can be minimal or it can reach up to millions depending on your credit limit and you are duty bound to pay that debt.
Borrowing money involves fees and charges, where interest charges are the primary cost of the loan. If you don’t pay off the debt on time the interest costs may make the personal debts to double or even triple in amount. In this case the interest rates due is even higher than the principal amount borrowed.
Secured and Unsecured Loans
If you want to get credit you can do so in the form of a loan. The loan can either be secured or unsecured. A secured loan means the borrowed money is supported by collateral or a security for the loan. The security or collateral comes in the form of a house, a car or any asset. An unsecured loan means otherwise.
Lenders require collateral before granting a loan because it gives them something to hold on to if you default in payment. When you fail to pay the debt within the agreed time frame then the creditor can foreclose the security.
In the case of an unsecured loan creditors don’t hold any security against the loan. But if you have such a loan this doesn’t mean that you can renege on your personal debts. When you fail to pay your loans, the creditor can run after you by filing a case in court. When you lose and have no cash you have to sell your assets to pay for your outstanding debt.
Good and Bad Personal Debt
There are good debt and bad debt. While being in debt is a natural thing it’s important for you to learn how to manage your debt and how to stay out of unproductive debts. One of the factors why most people are deep in debt today is the misuse of credit cards.
You can use credit cards to pay for almost any purchase even if you don’t have cash. It’s easier to spend because you just swipe it to get what you want. However, if you don’t use the cards wisely you’ll be in serious debt and risks of facing with legal actions for failing to pay off your cards when they become due.
If you have a choice try to avoid borrowing for consumptive spending. Also, learn how to use your credit for a good purpose and pay your debt when they become due. When personal debt management and budgeting process becomes a regular thing you’re on your way to financial independence.
Manage Your Personal Debts
Finding out who and how much you owe are the first thing you want to do before anything else. If you have several loans from different creditors, you probably won’t remember all details about debt balance or principal amount, interest rate and payment due date. By listing all your debts and calculate them you can clearly see your debt magnitude.
That is how you discover all the fixed expenses that you will be paying each month. To get the total expenses just add the fixed expenses to your monthly variable expenses.
To manage your debt you want to compare monthly total expenses to monthly income. This is your Debt to Income Ratio. Lenders use this ratio to set lending amounts. But you can also use it to decide whether to put extra payments to existing debts or find the right time for getting a new loan, especially if you can’t get a new loan.
Reduce Your Personal Debt
The best way to start reducing your debt is to set some goals. However, make sure you set realistic goals based your current debt to income ratio and your prospect of getting extra income. You can use this plan and calculator to simulate the right goals for your situation.
Your debt reduction plan will work for you if your debt level is still within your ability to pay back. However, if you are too deep in debt try to reduce your debt through negotiating repayment terms with your creditors.
Can’t get out of debt on your own? Consider working with a credit counseling service or a debt negotiation service to help you pay off your debts. There is a monthly fee as well as monthly payments to your creditors but if you’re working with a reputable agency the overall costs will justify the benefits you can get.
Specific Personal Debt and Loans
1. Automobile Debt. If you are struggling to make the automobile debt payments consider what alternatives you have to reduce the debt. That might mean selling your car or contacting your creditor to refinance it over a longer period with little less repayments.
2. IRS Tax Debt. If you have IRS debt ask yourself whether you want to solve the tax debt on your own, or with the help of a pro. Relying on your own efforts is rewarding but this is quite challenging. On the other hand, hiring a professional is the shortcut to success but it’s going to cost you money.
3. Medical Debt. Excessive medical bills can lead to personal bankruptcy. If you face special medical care not covered by any medical insurance be ready to get a visit from the collection staff of your medical practitioner. However, you can always ask if you can set up an installment plan to pay off the debt so you can still receive medical care from your doctor.