Paying Down Unsecured Loans is Critical to Financial Health

The Federal Reserve reports the state of the debt

Consumers are worried about their unsecured loans. According to the Federal Reserve, Americans currently owe $917 billion on revolving credit loans. Almost all of the debt is the result of credit card and about $70 billion of the total is currently past due. That is bad news for consumers and shows that most Americans are still hampered financially by the bad market and overwhelming expenses. For anyone looking to regain control of their finances, here are some tips to follow.

The future of credit lending

As a result of the huge amount of debt Americans carry and the level of defaulting loans, credit card companies are continuing to scale back lending. Lenders are drastically reducing lines of credit and some experts report that within the next year there will only be half as much credit available to the general consumer market. They predict that companies will continue to cut down credit for subprime borrowers and even for moderate to good credit customers. It is also suggested that there will be continued hikes in interest rates from credit lenders, despite other forms of interest decreasing. Financial analyst Martin Timbelset noted that due to the “depth and length of the current recession, lenders have another excuse to recoup their losses by any means possible.”

Paying down debt should be a priority

Any consumer holding a debt ratio of more than 35% will be looked at cautiously by lenders. The debt ratio is the amount charged versus the total amount of credit available. Normally 50% is enough to trigger lenders into categorizing a consumer as a high-risk borrower. It’s crucial to pay down debt for anyone in these categories. Assuming a consumer has the income adequate to start a payment plan, there are some steps to paying down debt.

  • Pay more than the minimum. Gone are the days of making only the minimum payment. Consumers need to realize that paying the minimum will only extend the lifespan of their unsecured loans and cost hundreds, possibly thousands in interest payments. For example, a consumer with an annual percentage rate of 18% who pays the minimum on a balance of $2,000 should expect to pay off the debt in about thirty-three years from now.
  • Pay off cards with highest interest rates first. Any mathematician will tell you that a slightly elevated interest rate on one card can mean a huge difference in the overall payout. Consumers should research which card has the highest rates and pay that one down first, then move on to the next, and so on. This is the way to quickly reduce the amount of interest being paid on the overall credit debt.

These two rules may sound simple, but many consumers continue to ignore them. For anyone wanting to pay down debt as soon as possible, this is the way to do it.

Finding a balance with credit

Finding a balance with unsecured loans is crucial to making peace with a good financial plan. The recession changed lenders’ leniency and more than ever they are looking to increase interest rates, create new fees and charge more penalties. Anyone looking to save money should focus on paying down debt. Not only will it cut back on a huge cost in a monthly budget, but it also will provide peace of mind along with a healthy financial future.

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