Consumers get into the same predicament that this couple is in all of the time. They get into debt and need help in figuring out what to do with their debt, how to repay it and how to reduce the interest rates on their debt.. They often ask, what do I do when my debt gets out of control?
In this case they have a mortgage, two car loans and 5 credit cards that alone total $75000 in debt. They are barely able to meet the monthly payments as well as paying high interest on the credit card debt. While the numbers vary, this situation is actually pretty common. This couple is fortunate that they have equity in their home.
We suggest that they refinance their mortgage at a low interest rate and use the money to repay all of their credit card debt. Once their credit card debt is fully paid, we suggest that they close two credit card accounts and reduce the limits on the remaining cards from $15,000 to $5,000 each. If they find themselves in the same situation in the future with the credit limits max’d out on their cards at least they will not owe so much. They will save themselves a great deal of interest which can be used to repay their mortgage.
The above lays out the broad plan for this couple. Details may vary depending on their credit rating, the actual appraised value of their home and their total monthly payments for all of their debt and regular maintenance and tax monthly payments. A lender will help them work out the details to determine exactly how much they can borrow and whether this solution will work for them.
Often individuals and couples do not have equity in a home to use as collateral while still finding themselves in an extreme debt situation. There are many solutions to these situations, some good and some not so good.
One solution is to take out a personal loan at a lower interest rate, pay off the credit card debt and then focus on repaying the loan. Whatever you do, avoid missing any payments to maintain and or improve your credit rating.
Some consumers will not be able to find lenders that will approve them for a loan of any kind due to their credit rating and past payment history. For these folks it can be very difficult. They must either get serious, work several jobs and focus on repaying their debt or take other more drastic action.
Bankruptcy is another solution and negotiated payments are another. Both require the services of an investment or financial adviser who can review their situation and suggest the best course of action. Note that each solution has some issues with respect to credit ratings, how much you need to repay and future borrowing ability. They are not always the best approach to take. If you can repay the loan, credit card debt etc, that is always the best approach to take.