Sometimes life brings surprises. If you can’t make payments on one or more of your loans, it’s best to take action sooner rather than later. Moving quickly helps you minimize the damage to your finances. Perhaps more importantly, the eventual cleanup is less stressful when you prevent things from getting worse.
Sometimes the solution is easy. For example, if you can’t afford your car payments, it might be possible to sell the car and switch to a less expensive (but safe) vehicle—or even do without a car for a while.
Unfortunately, things aren’t always easy, but several strategies help you stay on top of things.
If You Don’t Pay
It might help to talk about the worst-case-scenario first. If you stop paying on a loan, you eventually default on that loan. The result: You’ll owe more money as penalties, fees and interest charges build up on your account. Your credit scores will also fall. It may take several years to recover, but you can rebuild your credit and borrow again—sometimes within just a few years.
Don’t give up hope.
When You Realize You Can’t Pay
Hopefully, you have time before your next payment is due. If that’s the case, you can take action before you’re officially late on any payments. You may still have several options at this point, including:
- Pay late: It’s best to make loan payments on time, but if you can’t do that, slightly late is better than really late. Try to get your payment in within 30 days of the due date. In many cases, those late payments are not even reported to credit bureaus, so your credit will not be damaged. This leaves you the option of consolidating or refinancing debt.
- Consolidate or refinance: You might be better off with a different loan. Especially with toxic loans like credit cards and payday loans, consolidating with a personal loan results in lower interest costs and a lower required payment. Plus, a new loan typically gives you more time to repay. For example, you might get a personal loan that you repay over three to five years. Taking longer to repay might end up costing you more in interest—but it might not. Especially when getting out of payday loans, you could easily come out ahead. Apply before you start missing payments to qualify for a new loan. Lenders don’t want to approve somebody who’s already behind. Where should you borrow? Start by applying for unsecured loans with banks and credit unions that work in your community, and online lenders. Apply for these loans at the same time so you minimize damage to your credit and go with the best offer.
- Try secured loans: Consolidating with a secured loan can help you get approved if you want to pledge assets as collateral. However, you risk losing those assets if you can’t make payments on the new loan. If you put your house on the line, you could lose it in foreclosure, making things difficult for you and your family. Having your vehicle repossessed may make it hard to get to work and earn income.
- Communicate with lenders: If you foresee trouble making payments, talk with your lender. They might have options to help you, whether it’s changing your due date or letting you skip payments for several months. You might even be able to negotiate a settlement. Explain that you can’t make the payments, offer less than you owe, and see if they accept. This isn’t likely to succeed unless you can convince your lender that you’re unable to pay, but it’s an option. Your credit will suffer if you settle, but at least you put the payments behind you.
- Prioritize your payments: You might need to make difficult decisions about which loans to stop paying and which ones to keep current on. Conventional wisdom says to keep making payments on your home and auto loans, and to stop paying unsecured loans (like personal loans and credit cards) if you must. The rationale is that you really don’t want to get evicted or have your vehicle repossessed. Damage to your credit is also problematic, but it does not instantly disrupt your life in the same way. Make a list of your payments, and make a conscious choice about each one. Make your safety and health a priority as you choose.
So far we’ve covered short-term fixes. Ultimately, you need a long-term plan to stay on top of the bills. Life is less stressful when you don’t have to constantly put out fires, and ideally, you can move on to fund future goals.
- Emergency fund: It’s essential to have emergency savings. Whether it’s to get you out of a jam, or three months’ worth of living expenses, some extra cash helps you avoid problems. You don’t need to borrow when something breaks, and you can pay bills without interruption. The primary challenge is building your emergency fund, which requires spending less than you earn.
- Understand your finances: You need a firm grasp on your income and spending to be successful. Track every penny you spend for at least one month—longer is better. Remember to include expenses you only pay annually, such as property tax or an insurance premium. You can’t make smart decisions until you know where your money goes.
You might have to earn more, spend less, or both. For quick results, the most common solutions include taking on extra work, cutting spending, and selling items you no longer need. For longer-term success, work on your career and spending habits that can pay dividends for many years to come.
SOURCE: THE BALANCE