Thank you for your question about personal loans and personal debt.
You, along with many others, are faced with the challenge of paying off different types of personal loans and personal debt. In order to make your monthly payments on time, start by creating a good game plan, and review your situation regularly.
Your best solution for debt relief depends on your particular situation. To find a debt relief solution most appropriate for you, follow these steps:
- Identify the types of personal loans and personal debt you have.
- Create a personal budget and financial statement.
- Learn about debt relief solutions.
Understand the Type of Debt You Have
You mention that you have a number of types of personal loans and personal debts. These loans can be classified into three categories, as follows:
- Secured vs. unsecured debt
- Recourse vs. non-recourse loans
- Interest rates, risk, and credit
1. Secured vs. Unsecured debt:
When you take out a loan the lender will require some type of collateral, security or personal pledge. When you are required to pledge an asset, such as an house, car, or monies in a bank account, this is secured loan. If you don't pay as agreed, the lender can take the asset that secures your loan.
When you are only required to personally sign for your debt or loan, then this is called unsecured debt. The lender has decided to grant you a loan based only on your creditworthiness, income, credit score and net worth. If you don't pay as agreed, the lender cannot come after a specific asset, but has to use the legal collection process to collect from you.
2. Recourse vs. Non-recourse:
Personal unsecured debt is recourse debt. That means, if you default on your payments the lender is able to recover the money owed by suing you. The potential consequences of non-payment will be wage garnishments, bank levies, and liens on your personal property. When you take an unsecured personal loan, you have not pledged or encumbered any of your assets; however, if you default on the loan those assets might be at risk.
A personal non-recourse loan is debt that you take where you have have made no personal guarantee. The lender places a lien (or mortgage) on your asset (or property), and in the case of default uses that asset to repay the loan. The most common types of non-recourse loans are personal stock loans and commercial real estate loans. If you have a mortgage, you should check to see if your state has protections that make your mortgage a non-recourse loan.
3. Types of Loans and Interest Rate Risk
There are, as you pointed out, many different types of loans. These can be classified based on the asset used as collateral, or by the issuer. Some of the more prevalent types of personal debt or personal loans are: mortgage loans, car loans, boat loans, payday loans, credit card debt, personal revolving lines of credit or personal bank loans.
The interest rate that you will be charged (beyond the fluctuations in the market place) generally depends on the overall risk of the loan. Therefore, a mortgage loan, based on the property as underlying security and your personal guarantee, will have a lower interest rate than an unsecured credit card debt. One of the most expensive types of personal loans is the payday loan, because it is an unsecured loan and offered to people in difficult financial situations, making it a very high risk type of loan.
Always organize your financial affairs, so that you take on personal debt with an excellent credit score and assets, in order to obtain the best rates available.
Create a Personal Budget and New Worth Statement
In almost all personal loans your income and assets are at risk. If you do not pay on time, you face late fees, aggressive collections and even a lawsuit that can lead to foreclosure, repossession, wage garnishments, liens on personal property, or bank levies. It is of utmost importance to correctly manage your finances.
Bills.com has prepared a budget guide to help you manage your monthly cash-flow. Carefully analyze your expenditures over different categories, such as home, transportation and debt. Your debt-to-income ratios are critical factors when applying for a loan. Making and maintaining a budget is not an easy task. Be persistent.
Prepare a net worth statement by listing all of your major assets in one column, and your major liabilities, personal loans and personal debts, in the other column. The difference between your total assets and your total debts is your Net Worth. The value of assets fluctuate, so update your net worth statement monthly, along with your budget statement.
Another key factor which lenders evaluate is your credit score. Read Bills.com page about credit scores and apply for a free credit report from all 3 credit bureaus. Make sure that you monitor your credit reports periodically.
Find the Right Debt Relief Solution for You
Now that you have gained a better understanding of personal debts, and prepared your own financial budget and net worth statements, find the right debt relief program for you. There is no-one-size-fits all program. The best debt relief solution is one that is tailored to fit your situation. To find the most suitable program, you will match together your types of debts on the one hand with your asset mix and cash-flow on the other.
The major debt relief solutions are:
- Debt Consolidation Loans
- Debt Settlement
- Consumer Credit Counseling Services
Bills.com offers many articles, tools and resources to help explain the different debt relief options. Start by reading the article how to consolidate debt. Given your inability to meet your minimum payments on all your loans, you will find your options limited.