Consumer debt is soaring to new heights: in the fourth quarter of 2019, levels of consumer debt exceeded $4 trillion, with credit card and personal loan debt passing the $1 trillion mark. As the pandemic rages on, job losses and furloughs are likely to steep Americans further in debt as they struggle to manage their bills.
No matter your income level, properly managing your consumer debt is a wealth-building practice. Fortunately, if you are struggling to manage or reduce your debt load, you have options. From working with a debt relief professional to negotiating a reduction in your interest rates, there are ample ways to chip away at those monthly payment amounts. Once you do so, you can start to stockpile spare cash and rebuild your savings – and your credit.
Here are our five tips to reduce your monthly debt payments: consolidate, negotiate, transfer balances, seek help, and (as an absolute last resort) file for bankruptcy. Keep in mind that this is just a starting point and does not substitute the advice of a qualified professional. Always reach out for help if you are having a hard time getting started on implementing your repayment plan.
#1: Apply for a debt consolidation loan
Debt consolidation involves taking out a single loan to pay off all of your high-interest debts, then repaying the consolidation loan under a more forgiving repayment schedule. A debt consolidation loan can reduce your monthly payments and present an opportunity to score a lower interest rate. A personal loan or home equity line of credit can fulfill a similar purpose. However, be cautious about jumping at the first loan that lowers your monthly payments: there is always a tradeoff, and sometimes, the tradeoff involves extending your repayment period. This can result in paying more interest over time – which defeats the purpose of seeking the loan in the first place. Similarly, tools like home equity loans can result in you losing your home if you default on a payment. As such, you should always read the fine print before seizing the first option that is presented to you.
#2: Negotiate with your creditors
Consider contacting your creditors to ask if they are willing to accept a lump sum payment to settle your debt. Alternatively, ask if they are willing to reduce your interest rates. Before you do so, however, take some time to figure out what you can afford each month so you can present a solid proposal. Often, creditors (particularly debt buyers who purchase accounts for pennies on the dollar) are willing to accept something rather than nothing, so it is worth asking. If the initial answer is a no, don’t give up: travel up the chain of command and repeat your request to a supervisor. Make sure that you create a paper trail at every turn – and get a copy of any settlement agreement in writing!
#3: Transfer your balances
If your credit score is strong, you may qualify for a balance transfer credit card with a lower interest rate. This involves moving all of your credit card balances to one single card, which you will then pay off under different repayment terms. Some of these cards even offer a promotional period of 0% interest, allowing you to chip away at your debt in just a few short months. Keep in mind, however, that there are likely to be transfer fees involved, so make sure you are not biting off more than you can chew – and that you will actually be saving money in the long term.
#4: Work with a reputable credit counselor or debt relief agency
Credit counselors and accredited debt relief agencies routinely help consumers get out of debt. They can negotiate with your creditors on your behalf or help you apply for a debt consolidation loan, for instance, or help you craft a feasible budget. In some cases, they can even work with you to instill solid financial management skills so you can avoid falling into the same debt trap again in the future. When selecting an agency to help you, make sure you choose a reputable, accredited organization with plenty of strong reviews.
#5: Consider bankruptcy as a last resort
In some unique cases, you may feel as though you will never escape your debt trap and as such, you need a fresh start. This is precisely the purpose of the bankruptcy system. The federal Bankruptcy Code provides an option for debtors to discharge their debts by filing an income report and petitioning the court for relief. In some cases, consumers can have all of their debt discharged (a Chapter 7 bankruptcy). In others, they can seek a court-approved repayment plan to clear the decks (a Chapter 13 bankruptcy). However, keep in mind that bankruptcy is not a get-out-of-jail-free card: bankruptcy filings have a substantial impact on your credit report, not to mention, the upfront legal fees can be staggering. As such, it is worth exhausting your other options before engaging a bankruptcy lawyer.
Hope for financial freedom
No matter your situation, there is no debt that cannot be resolved in one way or another. If you get stuck, don’t hesitate to reach out to a professional, whether it is a credit counselor, attorney, or accountant. Ample resources exist to help consumers like you cast off their debt burdens and start fresh. The right option is out there for you: it is now time to claim it.
