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Learn about ways to tackle your debt to help you feel less overwhelmed. The more you know about how debt works, the easier it will be to make choices that are right for you.

Debt can be hard to face when it feels like a barrier to your goals, but it’s important to remember that there are resources you can use to help you take control of your debt. Even small steps toward paying down debt can make a big difference in making it feel more manageable.

Making sense of debt

Debt can be complicated.

There are many terms and concepts related to debt that are important to understand to help you better tackle your own debt.

GOOD DEBT, BAD DEBT?

Sometimes people label debt as “good” debt or “bad” debt.

Some debt can help you reach your goals or build assets for the future.

People will often say that borrowing for your education, for a reliable car, or to buy a home can be a good use of debt.

But it’s not always that simple.

You need to look at things like whether the benefit of that debt’s outcome (like a degree or training certificate) will outweigh the cost of the actual debt.

But those beneficial outcomes aren’t guaranteed.

For example, borrowing to further your education may be a good use of debt because earning a certification or degree could lead to a better paying job and more job security.

But if you take on the debt and either don’t earn a certificate or degree or aren’t able to find a better job, this student debt has set you back instead of helping you reach your goals.

Taking out a loan to buy a reliable car to get to and from your job can improve your job security, which helps you pay your bills and save for goals.

However, if you take out a car loan that’s longer than the remaining life of the car, you could owe money on the old car when you need to borrow for another one.

Or if you buy a more expensive car than you need, you’ll have less money for other bills each month.

While it may get you to work, it might keep you from reaching your other financial goals.

Taking out a loan to buy a home of your own may be a way to reach your personal goals.

But if you’re unable to keep up with the payments or if you end up owing more than your home is worth when you go to sell it, that debt may set you back for a long time.

Some people consider loans such as credit card debt, short-term loans, and pawn loans “bad” debt.

They may carry fees and interest, and if they’re used for things you consume (like meals out, gifts, or a vacation), they don’t help build assets.

But these sources of debt can help cover a gap in your cash flow if you have a way to  repay them that fits within your budget and doesn’t require borrowing again to pay for that original debt.

So there is no one type of debt that is “good” or “bad” for everyone.

That’s why it’s important to first understand your goal or your need before you borrow.

Then you can shop for the best way to pay for what you need, especially for large purchases like a car or a home, before you make the final decision on your purchase.

SECURED AND UNSECURED DEBT

Another way to understand debt is whether it is secured or unsecured.

Secured debt has an asset attached to it. The asset is given as collateral for the loan.

When debt is secured, a lender can take that asset if you get too behind on payments.

Here are some examples of secured debt:

• A home mortgage loan is secured with the home you are buying.

If you don’t pay your loan, the lender can foreclose on your home, sell it, and use the money from the sale to cover some or all of your loan.

In some states, the lender can ask you to pay the balance if the sale doesn’t pay off the loan.

• An auto loan is secured with your car. If you don’t pay your loan, the lender can repossess (repo) your car and sell it to cover some or all of the loan.

In some states, they can also ask you to pay the balance if the sale doesn’t pay off the loan.

• A pawn loan is secured with the item you have pawned.

The lender physically holds the item during the loan.

If you don’t make the payment when it’s due, the pawned item is eventually sold.

• An item purchased under a rent-to-own agreement, like a couch or television, must be returned or it will be picked up by the store if you don’t make the payment.

• Debt from a secured credit card is secured by funds you deposit at a bank or credit union when you open the card.

Your credit limit will generally equal your deposit.

For example, if you deposit $300, your credit limit will be $300.

If you don’t pay back the credit card, the bank can pay itself from your deposit.

You can use a secured credit card to build up your credit history.

This can help you qualify for an unsecured credit card in the future.

Unsecured debt doesn’t have an asset attached to it. If you don’t pay these loans, they often go directly to collections, since there are no assets associated with the loan to repossess. 

Examples of unsecured debt include:

• Credit card debt (most credit cards are unsecured)

• Department store charge card debt

• Medical debt

• Student loans

Co-signers: Agree to repay the loan

If you’re considering co-signing a loan, you should first understand what you’re agreeing to.

A co-signer is a co-borrower and has the same obligation to pay a debt as the primary borrower.

You owe the money that you co-sign for even if you don’t receive any of it.

Lenders sometimes ask for a co-signer when they are concerned that a prospective borrower won’t be able to repay a loan.

The cosigner helps decrease a lender’s concern about repayment.

Co-signing a loan is not simply serving as a character reference for someone else.

If you’re the co-signer, you have to pay back the loan if the borrower doesn’t pay it.

In most cases a lender or creditor doesn’t even have to first try to seek repayment of a debt from the borrower before seeking repayment from you as a co-signer.

Your credit scores may also be affected if the borrower is late with or fails to make one or more payments. Co-signing a loan may also affect your ability to obtain a future loan because a creditor may take into account the increased amount of debt that you have as a result of co-signing for a loan.

If you decide to co-sign for a loan, you should read the terms of the loan and consider carefully before taking on the risk of co-signing.

A joint account holder for a credit card has the same responsibility to pay as a cosigner on a loan.

Any past due balances of the other joint account holder will also add to your debt and affect your credit scores.

However, if someone is added to a credit card account as an authorized user, they aren’t generally responsible for paying past due balances.

But they are still able to use the credit card.

Be careful when adding authorized users to your account, because they can create added debt that you will then have to pay.

Types of debt

Different types of debt have different rules about borrowing and repayment.

It’s important to know these details so you can best prepare for how to better handle your debt.

Student loan debt

Many people take out student loans to help pay for their education.

There are two general types of student loans: federal student loans and private student loans.

Be sure to read your loan documents carefully to understand what kind of student loan you have and how long you have to repay it.

With both federal and private student loans, late payments will affect your credit history and may result in collections.

FEDERAL STUDENT LOANS

These loans are made or guaranteed by the federal government. They usually have names like Direct Loan, Stafford, PLUS, or Perkins. Federal student loans usually offer more flexible repayment options than private student loans.

The interest rate on federal student loans is set by the government and is fixed, which means it will stay the same for the length of the loan.

Also, with certain types of federal student loans (called subsidized loans), the government will pay the interest on your loan while you’re in school at least half-time.

REPAYING FEDERAL STUDENT LOANS

There are many options for repaying federal student loans to help make them more affordable to pay.

Paying your loans on time and being in good standing are important to help you qualify for these repayment plans.

So don’t ignore student loan payment notifications.

Missing payments on your federal student loans can hurt your ability to qualify for an alternative repayment plan that could lower your monthly payments.

You may not be eligible for an alternative repayment plan, based on the type of the loan you have and your financial circumstances.

If you do apply for a different repayment option, it’s important to continue making your loan payments under your current payment schedule until you receive written notification that you have been approved.

This ensures your loan will continue to be in good standing.

Many people take out student loans to help pay for their education.

There are two general types of student loans: federal student loans and private student loans.

Be sure to read your loan documents carefully to understand what kind of student loan you have and how long you have to repay it.

With both federal and private student loans, late payments will affect your credit history and may result in collections.

FEDERAL STUDENT LOANS

These loans are made or guaranteed by the federal government.

They usually have names like Direct Loan, Stafford, PLUS, or Perkins. Federal student loans usually offer more flexible repayment options than private student loans.

The interest rate on federal student loans is set by the government and is fixed, which means it will stay the same for the length of the loan.

Also, with certain types of federal student loans (called subsidized loans), the government will pay the interest on your loan while you’re in school at least half-time.

REPAYING FEDERAL STUDENT LOANS

There are many options for repaying federal student loans to help make them more affordable to pay.

Paying your loans on time and being in good standing are important to help you qualify for these repayment plans.

So don’t ignore student loan payment notifications.

Missing payments on your federal student loans can hurt your ability to qualify for an alternative repayment plan that could lower your monthly payments.

You may not be eligible for an alternative repayment plan, based on the type of the loan you have and your financial circumstances.

If you do apply for a different repayment option, it’s important to continue making your loan payments under your current payment schedule until you receive written notification that you have been approved.

This ensures your loan will continue to be in good standing.

PRIVATE STUDENT LOANS

Private student loans are made by a lender such as a bank, credit union, state agency, or a school.

They may have names like “alternative” or “institutional” loans.

Most private student loans have variable interest rates, which means that your interest rate could increase or decrease over the life of the loan.

Private student loans don’t generally offer the flexible repayment terms or borrower protections featured in federal student loans.

You might also need a co-signer to qualify for some private student loans.

REPAYING PRIVATE STUDENT LOANS

Private student loan repayment options are generally more limited than federal student loans.

If you’re having difficulty paying back a private loan then it’s important to communicate with your loan servicer.

Private lenders may offer forbearance options that allow you to delay some payments on the loan.

They may also offer alternative repayment plans, including plans where payments start low and gradually increase over the loan term (known as “graduated payment plans”).

Some private lenders may also modify loans based on a borrower’s’ financial circumstances, on a case-by-case basis.

Finally, some lenders will cancel or forgive debt upon the death or disability of a borrower.

To learn more about these options, contact your private student loan servicer

UNPAID STUDENT LOANS

It’s important to note that unpaid federal student loans can be collected in special ways, while private student loans are collected using regular debt collection practices.

For instance, the Department of Education can garnish some federal benefits, such as Social Security and certain Veterans’ Assistance benefits without a court order if you owe back-payments on your federal student loan.

They can also take unpaid federal student loan debt payments out of your tax refund.

If you’re afraid that your federal benefits could be garnished to pay off missed payments on unpaid federal student loans, consider talking to a lawyer.

Debt collectors or private student loan collectors can’t garnish your exempt federal benefits.

On both federal and private student loans, a loan servicer or debt collector can report the bad debt to a credit reporting company and can sue you in court to try to collect the remaining debt.

The Bureau has a section on its website dedicated entirely to helping you plan for ways to pay for education and training after high school.

Whether you are preparing for college, attending school, or already repaying your student loans, we have tools and resources to help you make the best decisions for you. Tools at consumerfinance.gov/paying-for-college can help you:

• Choose a loan •

Compare financial aid packages and college costs across more than one school

• Manage your money while in college

• Repay your student loans

Medical debt

For many people, a large portion of the money they owe is medical debt.

Thirtyseven percent of working age adults in America reported having trouble paying medical bills or having medical debt in 2016.71 Medical debt has increasingly been a major factor in the decline of credit scores for some people.

As of September of 2017, the three major credit reporting companies—Equifax, Experian, and TransUnion—must now wait six months before they include past due medical debts on your credit reports.

This gives you time to help address any delays or disputes that may arise with your insurance provider and settle the debts before the medical debt affects your credit scores.

Learn about some simple steps you can take to keep medical debt in check in the “Avoiding medical debt” handout.

Rent-to-own arrangements

Some people use a rent-to-own arrangement to get consumer goods, like furniture, electronics, and appliances.

This is where you rent the items and typically have the option to purchase the items in one of two ways: by continuing to make payments for a specific period of time or by paying off the balance during the term of the contract.

Items rented or purchased this way tend to be more expensive in the end than if you’d bought them outright.

If you miss a payment the rent-to-own company can take the item back. You also have the option to return the item at any time.

If you return the item or the rent-to-own company takes it back, you don’t get a refund of any money that you already paid.

Avoiding problems with debt

Sometimes people don’t have the money to repay a loan and the finance charges when they are due.

This can happen with short-term loans that have to be paid back in just one or a couple of payments.

In this situation, some people take out another loan to pay off the first one.

It can be difficult to escape the cycle of borrowing to cover the loan payment and still be able to pay for other expenses like food, rent, and transportation. If you’re considering a short-term loan product to meet an immediate need, it’s important to think about how you’ll pay off the loan before you borrow.

The kinds of loans that often lead to frequent re-borrowing have many things in common:

• Small dollar loans, generally under $500

• Must be repaid quickly (14 days is a typical payday loan term, for example)

• Require you to provide your bank account information to your lender, so that the lender can automatically take payments from your account.

If you don’t have sufficient funds in your account at the time of the automatic payment, you may have to pay fees to your bank or credit union for non-sufficient funds in the account

Make sure you know how you’ll repay your loan and how much the loan could ultimately cost you before agreeing to use any form of credit.

If you find that you can’t make your loan payment and cover your other expenses without taking out a new loan, ask the provider for a repayment plan that gives you more time to pay off the loan.

Some lenders may not offer you any options.

ALTERNATIVES TO SHORT-TERM LOANS

If you’re short on cash, consider some alternatives to borrowing small amounts of money for a short period of time.

• Negotiate for more time to pay if the loan is to pay a bill that’s due.

• Think about what you’re borrowing the money for.

Is it a need, an obligation, or a want?

If it’s a want, consider whether it’s possible to spend less money for it, not purchase it, or wait until you have the money for it.

• Use a credit card if you have one that is not maxed out— while it will increase your monthly card payment, it could be cheaper in the long run depending on interest rates and fees.

• Use lower-cost short-term loan alternatives from a credit union or bank.

If you don’t qualify for this type of loan, consider using the “Getting and keeping a good credit history” tool 

• Use your own emergency savings.  

 • Borrow from a friend or family member.

SPECIAL PROTECTION FOR ACTIVE DUTY SERVICEMEMBERS

Most types of consumer loans that are offered to active duty servicemembers and their dependents have to comply with the Military Lending Act (MLA).

These credit products now include, but aren’t limited to:

• Payday loans, deposit advance products, and auto title loans

• Overdraft lines of credit (but not traditional overdraft services)

• Installment loans (with the exceptions noted below)

• Credit cards opened on or after October 3, 2017

If you’re a servicemember on active duty and decide to take out one of these loans, you have rights under the MLA, including a limit on the interest rate the creditor can charge of 36 percent.

There are some loans the MLA doesn’t cover—namely, credit that is secured by property being purchased and certain other secure loans.

Loans not covered by the MLA generally include:

• Residential mortgages (financing to buy or build a home that is secured by the home), mortgage refinances, home equity loans or lines of credit, or reverse mortgages

• A loan to buy personal property when the credit is secured by the property you’re buying, like a car or home appliance

DEBT SETTLEMENT SERVICES

Debt settlement companies say they can renegotiate, settle, or in some way change the terms of your unsecured debt to a creditor or a debt collector.

That may include reducing the balance, interest rates, or fees you owe. It’s possible for you to try to do this yourself by contacting your creditors.

Debt settlement companies charge fees, but it’s generally illegal for them to charge up-front fees.

Some debt settlement companies advertise that they will help consumers, but they ask you to stop paying your debts while you save up money to settle the debts.

Not paying on your debts can create problems for you.

You should avoid doing business with any company that promises to settle the debt if the company:

• Charges any fees before it settles your debts

• Promotes a “new government program” to bail out personal credit card debt

• Guarantees to you that it can make the debt go away

• Tells you to stop communicating with the creditors

• Tells you it can stop all debt collection calls and lawsuits •

Guarantees that the unsecured debts can be paid off for pennies on the dollar

 

 

When debt collectors call

Learn about your rights concerning debt collectors and what to do if they contact you.

When companies decide they no longer want to try to collect overdue debts, they may assign or sell those debts to third-party debt collectors.

There are laws about how debt collectors can act, what they can say, and how they can treat you.

The Fair Debt Collections Practices Act provides you with rights when a debt collector is trying to get you to pay a debt.

A debt collector can’t:

Call repeatedly to harass you or abuse you

Use abusive or obscene language

Threaten you by saying they’ll take action they can’t or don’t intend to take

Call you without telling you who they are

Lie to or mislead you

Publish your name for not paying a debt

You may want to discuss your debt issue with a lawyer.

Visit consumerfinance.gov/ askcfpb/1433 to find a lawyer in your area.

What to do Review the questions to ask if a debt collector calls.

Fill out the template to request more information from the debt collector.

Carefully review and check the box next to the information you’re requesting.

If the debt isn’t yours, fill out the second letter template to dispute the debt.

When debt collectors call

Be cautious and keep records. You don’t have to share private information (like bank accounts) no matter what debt collectors say. Write down all dates, times, and detailed notes of what’s said for each call. Save everything debt collectors send and make copies of anything before you send it (don’t send originals).