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.