In its simplest form, debt is defined as money owed by one party to another. But it can quickly get complicated. Depending on how much you have and how you manage it, debt can be a useful financial tool or complicating baggage.
Know how manage your debt can be tricky, especially if you’re struggling to cover your monthly payments. There are different ways of approaching different types of debt – and find debt relief. Just beware of any business that over-promises or looks too good to be true, such as debt forgiveness.
We break down the different forms of debt and how to manage them.
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Secured or unsecured debt
There are two types of debt: secured and unsecured.
Secured debt means that the borrower has pledged an asset as security for the loan. Auto loans and mortgages are common examples of secured debt. If you fail to repay as agreed, the creditor can foreclose the asset, such as repossessing a car or foreclosing on a house.
Unsecured debt, on the other hand, is not asset-backed. A common example is credit card debt. However, that doesn’t mean that you get away with worrying if you are unable to repay.
A credit card issuer, for example, will likely sell your overdue debt to a third-party debt collector, who could then harass you for the payment. If you don’t pay the debt collector, they can sue you for the payment, which can lead to wage garnishment. Some very aggressive original creditors can sue you directly, without going to a collection agency.
Explore these forms of debt to learn more about what they are and how to manage them.
Credit card debt is one of the most common – and costly – forms of unsecured debt.
Depending on your personal credit score, the annual percentage rates, or APRs, on your credit cards can be between teens and 20s. Not paying off your entire balance every month can get expensive, fast.
Medical debt can stem from a routine visit to your doctor or from an unexpected event like a broken bone or hospitalization. This type of debt can be costly, and further complicating matters, there’s no clear way to deal with it if you can’t afford to pay it off all at once.
Use a medical credit card.
Hire a medical bill lawyer.
No matter how short of cash you are to pay your medical bills, avoid putting the bill on a credit card. Most medical providers do not charge interest; transferring this debt to a credit card negates this benefit and may make it more expensive.
If you’ve graduated from college in the past few years with student debt, there’s a good chance you have a large balance. On average, American households that had student debt in 2020 had a balance of $ 56,572.
Student loans are either federal or private, with a variety of loan types in between. No matter where the debt comes from, you will likely be paying off your student loans for years to come.
Call your student loan manager to discuss relief options.
Sign up for an income-based repayment plan.
Ask for forgiveness, if you qualify.
Beware of companies that promise full debt relief help – many are scams.
Personal loans can help consolidate credit card debt or provide cash flow for a specific reason, such as renovating a home. Loan terms are typically two to five years, with interest rates ranging from 5% to 36%.
If you are having difficulty repaying your personal loan:
Call the lender to see if you can defer payments or follow a hardship plan.
Auto loans are a form of secured debt, which means that if you don’t pay, the lender can repossess the car that is used as collateral. Auto loans are getting longer and more expensive. This can make them more difficult to pay, especially if your budget is tight.
Here’s how to handle an expensive car loan:
Getting a mortgage is probably the biggest personal finance decision you’ll ever make. They typically last for decades and cost hundreds of thousands of dollars. In 2020, the average American had a mortgage balance of $ 190,595, according to the NerdWallet Debt Study. A mortgage is a secured loan, which means the bank can take your house if you don’t pay it as agreed.
But you have a recourse if you have difficulty paying your mortgage:
Debt is often a necessary component to keep a small business running. You can take out a loan or a line of credit to hire more people or buy new equipment.
But too much debt can hurt your business’ cash flow and potentially put your business at risk.
It is common to have an account in the collections. About 28% of consumers with credit records do so, according to a 2020 Consumer Financial Protection Bureau report.
However, knowing how to handle debt during collections can be difficult. Here are some steps to follow if you are stalked by debt collectors: