Understanding Debt Problems & Solutions

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1 Understanding Debt Problems & Solutions

2 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

3 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

4 Secured = Collateral Mortgage Auto Loan RV Boat 2 Types of Debt Unsecured = No Collateral Most Credit Cards Signature Loans Student Loans

5 Common Interest Rates Credit Card % Signature Loan - 9% Payday Loan - 300% - 750% Student Loans - 8% Auto Loan - 4.3% Title Loan 100% Home Loan - 4.5%

6 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

7 Average Spending 10% Housing 18% 38% Transportation Food Debt 5% Other Savings 13% 16%

8 4 Major Reasons for Debt Mortgage Auto loan Student Loan Credit Cards

9 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.

10 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

11 Auto Loan Example Car Price: $20,000 Down Payment: $500 Auto Loan: $19,500 Term: 72 Months Interest Rate: 6% Monthly Payment: $ Total interest paid = $3,756 Car Price: $20,000 Down Payment: $3,500 Auto Loan: $16,500 Term: 48 Months Interest Rate: 6% Monthly Payment: $ Total interest paid = $1,644

12 Student Loan Debt Currently at $1.26 trillion Increasing at $2,854 per second Average debt load $29, million Americans carry student loan debt

13 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

14 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.

15 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.

16 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

17 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%

18 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

19 The Wrong Way to Get Out of 1. Home equity loans 2. Credit card advance 3. Gambling 4. Pawn shop loans 5. Payday loans 6. Title loans 7. Borrowing from family Debt

20 Possible Debt Solutions Reverse Mortgage Debt Settlement Student Loan Counseling Debt Management Plan Bankruptcy

21 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

22 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

23 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

24 The Pros: Debt Management Plan 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

25 The Pros There is more than one option Will stop creditor calls You will be granted debt relief Bankruptcy 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

26 Case Study: 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.

27 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

28 How the Flays Spend Their Money Mortgage/Rent $1,200 Car payment $300 Insurance $200 Student Loans $400 Groceries $600 Credit Cards $400 Medical Bills $110 Memberships $ 25 Cable & Internet $150 Cell Phone $ 75 Pedicure $ 40 Golf $ 80 Morning Coffee $ 80 Entertainment $150 Shopping $150 Total monthly bills = $3,960

29 Separate Wants & Needs Mortgage/Rent $,1,200 Car payment $300 Insurance $200 Student Loans $400 Groceries $600 Credit Cards $400 Medical Bills $110 Memberships $ 25 Cable & Internet $150 Cell Phone $ 75 Pedicure $ 40 Golf $ 80 Morning Coffee $ 80 Entertainment $150 Shopping $150 Needs = $3,210 Wants = $750

30 Analyze the Wants Memberships $ 25 Cable & Internet $150 Cell Phone $ 75 Pedicure $ 40 Golf $ 80 Morning Coffee $ 80 Entertainment $150 Shopping $150 $20 $40 $75 $75 Eliminate some for $295 savings Cut back on some for $245 savings Total savings on wants = $540

31 Analyze the Needs Mortgage/Rent $1,200 Car payment $300 Insurance $200 Student Loans $400 Groceries $600 For mortgage & car, look at refinancing if 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 Credit Cards $400 Medical Bills $110 In-depth analysis 0% interest keep paying on time and extra if possible

32 A Closer Look at Credit Cards Total credit card debt $16,000 Credit Card balances & interest $7, Interest 18.9% $2, Interest 21.9% $3, Interest 19% $1, Interest 0% $2, Interest 24.5%

33 Which should the Flays tackle first? The Flays have $ extra due to reducing and eliminating the wants. $7, Interest 18.9% $120.00/mo $2, Interest 21.9% $ 60.00/mo $3, Interest 19% $ 70.00/mo $1, Interest 0% $ 60.00/mo $2, Interest 24.5% $ 90.00/mo TOTAL $ /mo

34 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.

35 Debt Waterfall Example Credit card payment $50.00 Auto loan payment $ Medical care $ Mortgage payment $1, Once your credit card is paid in full, apply the $50.00 to your auto loan. You would then be paying $ Once your auto loan is paid in full, apply the $ to your medical care payment. You would then be paying $ Once your medical care payment is paid in full, apply the $ to your mortgage, and you would be paying $1,

36 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?

37 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!

38 Call: 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.