Today, we are witnessing lenders charging exorbitant interest rates for their financial products. It is not uncommon for credit card interest rates to be 25 percent. The products of payday lenders have the same, and often higher, interest rates as credit cards. Simultaneously, many Americans are living from paycheck to paycheck, one small financial problem away from disaster. Some end up borrowing from multiple, high interest lenders in order to barely keep afloat. For this reason, many people are beginning to be swept into further financial difficulties under the strain of these payments.
It is important that consumers in such financial difficulties consult reputable, industry leaders, like Barron Advisors, in order to find a safe and effective solution to help them achieve economic stability.
There are a few options that can help you if you are struggling under the burden of high interest payments. Some of the following debt relief options will harm your credit, others may or may not harm your credit, while some of the options may actually improve your credit.
Bankruptcy –
Bankruptcy is often the most extreme form of debt relief. One of the two forms of bankruptcy, Chapter 7, will discharge most of your debts and will likely wipe out the high interest payments, which are typically unsecured. What bankruptcy will not wipe out is debt from child support, most all student loans and unpaid taxes. Bankruptcy will get rid of the credit card, payday loan, medical and personal loan debts you owe. According to NerdWallet, a bankruptcy can be completed in less than four months. During the process, though, you will not be able to use credit cards. It will destroy your credit, and the bankruptcy will show on your credit history for 10 years. This may keep you from being hired in certain industries, or from being considered for a new apartment.
A Chapter 13 bankruptcy is different in that you will be making court-ordered payments to creditors according to a schedule created by the court. Chapter 13 helps people who are about to lose collateral, such as their home to foreclosure, by making payments for three to five years to get caught up. According to NerdWallet, if a person completes all of the payments, the Chapter 13 bankruptcy will only stay on their credit history for seven years, and it will allow them to keep their home or car from being foreclosed or repossessed. Motley Fool advises that another benefit of Chapter 13 bankruptcy is that the court does not allow creditors to charge any interest during your repayment plan.
Debt Management Plans –
These plans do not involve the bankruptcy courts. Instead, they are administered by credit counseling agencies. Debt management plans work to help people solve their unsecured debt, such as credit card debt, by making payments at reduced interest rates and/or having fees waived. This is negotiated by the credit counselors. You make one payment, which will be lower than what you were required to pay in the past, to the credit counseling agency. They distribute the proceeds to the different creditors. You will not be able to use your credit cards until the payment plan is complete.
It is important to ensure that the credit counseling agency is accredited and that you are not being charged exorbitant fees. The U.S. Department of Justice has a list of approved credit counseling firms.
A debt management plan will not harm your credit. When you complete a portion of the plan and pay off a card, closing the account may harm your score somewhat.
In the case of both the debt management plans and Chapter 13 bankruptcy, NerdWallet advises that many people do not end up being able to complete the payments.
Debt Settlement Programs –
Debt settlement programs, according to the Consumer Financial Protection Bureau, are one of the worst ways to attempt debt relief. They involve depositing money each month with a debt settlement company and refusing to make any payments to creditors. The debt settlement company then keeps attempting to coerce the creditors to take a lump sum from the money accrued in the account and forgive the rest of the debt. This type of program has several dangers:
- The debt settlement company may defraud you of your money
- The creditors will sue you and garnish your wages instead of settling
- Your credit score keeps going down as you keep missing payments
Debt settlement processes can take from six months up to several years to resolve. They are ill-advised in most cases.
Debt Management on Your Own –
Some consumers are able to negotiate their own lowered interest rates with creditors or get creditors to accept a lump sum in lieu of the full amount owed. The former is often successful. Motley Fool suggests getting creditors to accept lower interest rates under the threat you will file for bankruptcy. Often, you can get a cheaper rate under such circumstances.
Others who still can garner the credit to do so might be able to secure a credit card with a lower interest rate that has a balance transfer program without fees. The Motley Fool suggests, though, that you look at the fine print and ensure that the interest rate doesn’t increase down the road.
If getting the creditors to lower interest rates and reduce fees or getting a balance transfer credit card works, and you successfully make your payments from then on, your credit score will not be harmed and will improve over time.
Debt Consolidation Loans –
These loans allow consumers to get one loan that covers all of their unsecured debt that will likely be at a lower interest rate. The payments may or may not be lower, but they will be able to pay off the balance due more quickly than if they retained the credit cards and continued to make separate payments on each card.
Debt consolidation loans can be through home equity lines of credit or through personal loans. The former type of debt consolidation loan will have a lower interest rate than a personal loan, since it is secured by collateral.
Of course, any option that has you making payments to get debt relief will have to be successfully completed, otherwise your credit will suffer.
Advantages of debt consolidation loans include –
- Lower monthly payment that can help consumers avoid taking on further debt
- One payment to make each month
- Lower interest which helps payoff occur more quickly
- If you are successfully making the debt consolidation payment each month, your credit score will improve
- Your stress level will decrease if you end up with extra money each month, rather than being behind in bills
There is one big danger of taking out a debt consolidation loan. Since
consumers are often able to retain their credit cards while they are paying off
their debt consolidation loan, they can make the mistake of racking up more
debt and end up in a worse situation than they had before they took out the
loan. Also, a debt consolidation loan that uses a home equity line of credit
can place their home at risk, if they don’t use discretion and simply amass
more credit card debt while they are paying off the loan.
It is essential for consumers to deal with reputable debt consolidation
companies like Barron Advisors in order to get a consultation and find out if a
debt consolidation loan is the best option in their current circumstances. These
loans can help reduce the burden of exorbitant interest rate payments. This can
help your credit by providing needed breathing room in your budget with a lower
monthly payment and lower interest rate.
Overall, any method of debt relief needs to be approached with caution,
research and through advice by companies that are highly reputable industry
leaders, such as Barron Advisors. Also, you will need to choose only those
options where you realistically can make the required payments each month.
Otherwise, your credit will suffer, and your financial situation will deteriorate.