Debt repayment goals are likely to feature on any list of do-better resolutions we produce at the start of the year. Before the ink dries you may want to take a second look at your debt reduction choices because successful outcomes depend on you and some choices are simply better than others.
Avoidance – Refuse & Reduce
Of course, avoiding the problem altogether is the best option, this is the obvious solution to having a sustainable relationship with our financial resources. Although, it’s equally clear that this is not a realistic way to dig your way out of a money-pit from over-consumption. However, spending less is critical to regaining balance with your incomings and outgoings as you transition to positive cash flow and positive net worth.
No matter how bleak your debt profile may be, you are not alone. We’re constantly bombarded with marketing messages to consume and spend. The image creators are very good at making us think that we’ve ‘just gotta have’ the right house, latest car, newest phone, this seasons clothes, the right vacation, and more. They want you to spend because that’s how they make money.
There’s precious little advertising urging us to save for retirement, or pay a little extra off our mortgage balance. It’s challenging spending less than you earn, saving money, and many statistics back this up. Consumer spending accounts for an astonishing 70-80% of the economy – our GDP depends on people spending just about all they have. The current average household savings rate is 3-4% and has even been negative in recent years. So, while some of us manage to save a little, there’s many of us that are not, and probably going backwards. This is not a sustainable way to live and will surely cause misery unless you can shift towards positive cash flow.
Start by spending less than you earn, then save what you can.
Debt Repayment Options – Use Cautiously
Dipping into your savings to repay debt may be an option if you have some financial reserves. If this will prevent you from losing your house to foreclosure or your car from repossession, this could be a good option. However the psychological cost of wiping out your savings may be too much the bear. Preserve your savings if possible, and open a dialogue with your creditors to find a repayment solution that works for both of you. Workouts are better than complete default for creditors as they avoid an outright loss. Ask the question, you might be surprised by what you can accomplish.
Selling assets to repay debt can be a great solution. However, yard sales and online auctions will only make you so much money, and you’re not likely to get what you expect for your prized golf clubs or vinyl collection. Larger debts may need aggressive action such as selling vehicles or real estate. Always consider the tax consequences before taking action and of course, don’t sell your only transportation to work.
Borrowing from friends and family may work in some situations. Make sure you have an agreement in writing when accepting money this way. You want to know up-front whether your receiving an outright gift, or entering into a loan contract with a repayment schedule. Life is too short to have financial disagreements come between friendships and family so be proactive.
Debt Repayment Options – High Risk
Payday lenders aggressively market their services, no doubt because of the always-high demand for cash and the profitable nature of their business. A payday loan is generally characterized by its low dollar amount, short repayment terms, and borrowers often give lenders access to payment through a claim on a deposit account.
The advantage of this facility is rapid access to cash. However, if you’re able to hold-off or delay other creditors briefly, until you next get paid, then managing without an additional credit obligation may be possible.
High fees can be a drawback to these short-term accounts. Be sure to calculate the fee as a percentage of the loan amount on an annualized basis. This will give you an idea of the real cost of the loan.
Borrowing against your home is a risky strategy. It generally means you are replacing short-term debt with a longer-term, and offering creditors security for your otherwise unsecured debt. Even though real estate interest rates are probably lower, and may be tax deductible, you run the very real risk of foreclosure if you don’t change the root causes of your over-spending.
Credit card juggling is not a sustainable debt repayment strategy. Satisfying one creditor by borrowing from another could ultimately cost you more money in interest expenses and again, this is not targeting the underlying problem of too much debt. Consider paying the minimum due on your accounts while aggressively attacking the highest interest credit card, and then move to repay the next highest interest account.
Credit card debt must be taken seriously. If creditors can prove that you had no intention of repaying the account when you used the facility, you will likely be charged with fraud. In this case you may still be liable for this expenditure in the event of bankruptcy.
Debt Repayment Options – Strategies to Avoid
Overdraft features are increasingly being offered on basic checking accounts. It may sound appealing to have an emergency line of credit backing you up if you write checks that you can’t pay for. This product is designed for businesses. The fees and high interest do nothing to help families get out of debt – it’s an expensive option.
If bouncing checks is a concern for you, then consider funding a savings account with your bank and instruct them to firstly take any additional funds needed from this account rather than an overdraft. This should be a free service, and will save you ongoing overdraft fees and interest.
Of course, it’s preferable if you don’t bounce checks in the first place. Personal finance software or mobile apps can easily help you to track your money, and help to prevent writing unfunded checks.
Disposing of collateral on secured loans is probably prohibited by your loan agreement. If you sell a car for example, then you must pay-off and close the associated car loan. Failing to do this is a crime. Plus, doing anything else is unlikely to help your debt situation over the long-term. The debt still needs to be repaid and it’s better to do this without fines, penalty fees, and lawyers to pay.
Pawn Brokers are a tempting source of quick cash when you need to satisfy creditors. The reality is that you will only receive a loan of about half the marketable value of your collateral. Does that sound like a good deal to you? It’s such a good deal for the pawn broker, and a bad one for you, that they’re actually ok if you don’t repay the loan and reclaim your collateral. They’re very good at marketing your relinquished possessions and make good profits, plus the fees you paid for the loan.
Why not sell your assets yourself? Craigslist and eBay make it easy and you will likely receive a better sales price this way. It may take some time, but ultimately your pawn broker is going to sell your goods this way. Do the work, find the real market value, and keep this money for yourself.
Tax refund anticipation loans are not designed to help you. While it may be tempting to directly receive your tax refund from your tax preparer as you file your return, it’s probably costing you a whole lot more than you realize. For a fee of less than $100 (in most cases) you can enter into these agreements. It gives you instant cash, and your creditor / tax preparer closes the account when the IRS processes your return.
The problem here is that the IRS takes only a few weeks to process most claims. You ultimately pay a large fee for a very short-term loan, which translates into an astronomical interest rate when calculated on an annual basis. Again, this strategy will not help you repay your debts more effectively over the long-term.
We could discuss not-so-great debt repayment options all day, like waiting for your lottery numbers to drop or banking on Publishers Clearing House to come through for you. It’s all up to you to make the best decision with each dollar you earn. It may not be exciting, but formulating a sustainable financial plan is the best way to avoid ever needing to resort to harmful, desperate measures.