Handling debt during hard times
IS THERE a worse feeling than having debt and not knowing how or when we’ll be able to repay?
We can all think of the sleepless nights and the anxious days of worrying about debts. We fear our creditors will embarrass us. This article provides six tips on handling troublesome debts, particularly during hard times.
Cut discretionary spending. We have tips to guide with reducing discretionary spending from previous articles. Even if your budgeting allows you comfortably to meet your repayment installments, it is useful to consider repaying more than the required installment just to be free of the burden of debt sooner.
Avoid using your credit card. Funds advanced on your credit card add to your personal debt, so minimise its use. Your aim is to stick close to your cash budget when spending, striving to live within what you can afford and so avoiding the continuing buildup of debt.
Talk to your creditors. Our natural urge is to avoid persons we fear or think are likely to embarrass us. When it comes to people or institutions that you owe, you must resist this urge with every fibre in your body. The outcome is more likely to be favourable if you call your creditors, visit with them and discuss your situation as early as possible when you foresee problems. This allows you to negotiate your circumstances from a more positive position than when your creditor has to seek you out, bearing the frustration and disgust of your not meeting the agreed payments.
This is one of the most potent solutions to dealing with an overdue debt situation. Particularly during hard times, many creditors live in their own arena of fear that they will lose principal and interest. Once such creditors have a better understanding of their debtors’ situation and receive an undertaking to repay in full (or even substantially in part) over a delayed period, they typically will try to work on the revised timing of the repayment.
Refinance your mortgage. You may consider refinancing your mortgage, in order to provide additional funds for repaying another loan because the mortgage interest will be lower than that on the loan, and/or in order to extend the period of the mortgage so that the installments are reduced. This can provide just the ease needed in your personal budget to make your financial life tolerable again.
Alternately, in really difficult times, through discussion with the mortgagee, you may be able to negotiate a moratorium on the full payment or on the principal repayment for an agreed period of time.
Consolidate debts. Gathering together all or a number of your debts and approaching a lender about consolidation into one loan can also provide an ease in the monthly cash needs. Typically, the consolidated loan provides a lower interest rate and/or a longer repayment period. Home equity loan are popular vehicles for debt consolidation. This is because mortgage interest rate tends to be the lowest personal loan interest rate available.
Seek financial advice. If you find yourself in a complex and dire debt situation, it is recommended that you seek financial advice. An advisor may take the lead in listing and ranking your debts and negotiating with creditors in coming up with a manageable strategy. An advisor can also review your budget and pattern of spending and give you pointers for your unique circumstances of income and expenses.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.