I’m often surprised when people with personal debt problems seek out expensive debt reduction services as a first step. This is because there are some highly effective debt negotiation services out there which you can do yourself at a relatively low cost. Let me explain. Let’s say your debt has become unmanageable. There could be many reasons for this and the most common are a loss of income, relationship breakup or just letting the situation gradually get out of control. Whatever the reason, there are some very effective strategies you could engage to resolve the situation for yourself.
Before I delve into some of these strategies, I want to make sure that you understand two facts: one, your creditor wants you to pay your debt! And two, your creditor wants to avoid you not paying back your debt. Those two facts are two different things and the second is a major source of leverage. What I mean is that if your creditor thinks they may not recover any of your debts, they might be prepared to make a deal. That is, to your creditor something is better than nothing.
Debt Negotiation Principles
It’s important to understand that when your creditor (probably a lender in this case) agreed to lend you the money, they undertook a credit assessment. What that means is they assessed the likelihood that you would be able to make all the repayments. At the time of your loan application, if your creditor thinks there is some risk, they either don’t lend you the money at all or they will mitigate the risk.
To explain risk mitigation in this case; when the lender believes there may be a risk of default (you missing one or more payments), they may choose to still lend you the money but they will normally manage the level of risk by either:
- Increasing the interest rate – earning more from the loan but understanding the statistical likelihood that you will default on one or more repayments.
- Seeking some form of security – so that they can recover their losses if you don’t pay. (An example of this is taking ownership of your car if you don’t make your car loan payments).
- Having a guarantor on the loan – a guarantor guarantees that you will pay the debt and is a co-signatory on the loan. If you’re unable to service your loan the creditor will seek to recover the remaining debt from your guarantor.
If you do find yourself in a difficult situation and are likely to or already have defaulted on your loan, negotiating with your creditors is a wise move. The first step in the negotiation process I would suggest is applying for hardship provisions.
Requesting Hardship Support
Applying for hardship support is easy, especially if the problems you’re experiencing are temporary. Simply call your lender as soon as you can (don’t wait for the situation to worsen), explain your situation and request a pause on your repayments.
Remember that your lender is assessing their risk. If you were to apply for bankruptcy for example, it’s likely they would not receive any more money. That’s something they will want to avoid at all costs and a pause in repayments will likely be preferable.
Sometimes you might just need a month or two to get back on your feet. Maybe you’re between jobs and finances are tight. If your lender understands you intend to pay back the debt and just need some time, they will normally be happy to oblige.
I am aware of many cases when we’ve applied for hardship support on behalf of clients and the lenders have stopped interest accruing while they wait for their customer to get back on track. We have cases where they have agreed to up to a three-month pause. This gives you time to sort out your situation and resume paying your bills.
Renegotiate Your Debt
In some cases it pays to re-negotiate the terms of your agreement. In these cases you need to demonstrate that you simply won’t be able to repay the loan in full but are willing to continue paying what you can afford.
Often you can negotiate to pay back less than is currently outstanding. Let’s say you have $30,000 outstanding on a car loan at a 40% interest rate, you may be able to negotiate to repay $22,000 at the same rate. While that may seem a high rate, forty percent interest rates for a car loan is not uncommon.
Lenders tend to measure their default rates; i.e. the percentage of loans or the loan amounts that are never repaid. They expect some amount of default. It’s never zero. So they are prepared for the situation you’re now presenting.
The key to negotiating this sort of deal is to understand that your lender would much rather receive most of the money rather than risk losing it all. During the negotiation you might mention that another option for you is to declare bankruptcy. That’s what I meant by “leverage” earlier in the article.
If you have equity in an asset, like a house for example, you might be able to restructure your finances to reduce your repayments. Let me explain.
If you have a house worth say $400,000 and you owe $300,000 on the mortgage at say 3% interest, then you have $100,000 of equity in your home. Now let’s say you have a car loan of $25,000 at 30% interest. You could negotiate with your mortgage provider to extend your mortgage by $25,000 and use the money to pay off your car loan.
The benefit of this approach is that you pay a lot less interest on the loan. Instead of paying 30% on the $25,000 car loan you now pay 3%. That’s a big difference!
You will need to be cautious though. Make sure the fees your mortgage lender charges does not offset the interest savings! And understand that if your home loan is paid back over 20 years, while you will be paying a much lower interest rate on the $25,000 you will be paying interest for a lot longer than the original term of your car loan.
Debt Negotiating Services
Although it may seem daunting to contact your creditors and propose one of these methods, it’s really not that difficult. I would urge you to try before you seek help from a debt negotiation services company. You could save yourself a lot of money.
Having said that, professional debt negotiation companies can make it easy and are expert negotiators. You may find that having a professional on your side greatly reduces your stress. They know how to get a good deal too. So if you’re not willing or able to negotiate yourself then you might consider talking to a few companies to see what they can do for you. It pays to shop around so talk to a few.
If you find yourself in a difficult financial situation for whatever reason, there are some useful tactics that you can apply yourself. Whether it’s seeking hardship support, renegotiating your debt or consolidating to lower your costs, the important thing is to get started. The longer you delay the more difficult it will be.