Introduction

Managing money, debt and available credit can become complicated. Many people don't have the time to review the interest rates, surcharges and other situations that all add up to the true cost of borrowed money.

Purposes

This article covers some of the basic topics related to debt and can serve as an outline for a Member Services conversation you can have with a Navigator 24/7.

Table of Contents

Topics for Review

Introduction

There are different loan types based on the intended purpose of the money and other payment terms.

Secured Debt

Loans like mortgages and auto loans are "secured" debt, which means the repayment of funds is "secured" by the value of the property which will be repossessed or foreclosed and sold to repay the loan if you are unable to repay it.

Unsecured Debt

Unsecured debt does not have property or other assets to "secure" its payback. Since lenders have fewer options for recovering their loan if you do not pay it, unsecured loans are typically much more expensive to the borrower.

Revolving Debt

The term "revolving" debt means that you can pay down your balance and borrow more at the same time. Each month what you owe is recalculated and can be extended into the future.

Summary

There are many variations of secured, unsecured, revolving and fixed-term loans. The complete details of a loan may not always be clear at first glance. It is important to familiarize yourself with the specific terms of a loan (and the circumstances under which the terms can change).

Credit Cards

Introduction

The term "credit cards" refers to cards and accounts that let the holder disburse money in-person or online. Users can swipe, tap or use other devices like their phone at a checkout or enter the 14-16 digit account number in apps or websites to make purchases.

Transactions

Money you spend on a credit card is instantly borrowed from a lender. Some lenders charge you a fee right away, while others start to charge fees if the money is not repaid within a preset period of time (for example 30 days).

Annual Percentage Rate (APR)

Credit card fees are typically calculated using an "interest rate" which is a percentage of what you borrow (for example 20%). However, borrowing money on a credit card at 20% doesn’t mean it costs you a one-time fee of 20%. It means you pay at least 20% every year for as long as you carry a balance. That means time is an important factor in how much credit card purchases really cost.

Minimum Due

When credit card payments are due, you can choose to pay the “minimum due”, which is a small fee to delay repayment of your loan. "Minimum due" payments do not typically reduce the balance very much (or at all) but instead add more fees by delaying payment.

Compound Interest

Interest fees are calculated using a technique called “compound interest” which means you pay fees on your fees. As interest fees build, they are added to the amount you have already borrowed and you are charged interest on both. Your debt grows more quickly over time with compound interest.

The True Cost of Money

Here is an example of the same credit card debt paid off in 2 years vs 10 years.

Debt Consolidation

If you have debt and wish to reduce it, speak with your Noble Navigator.

Student Debt

Introduction

The term "Student Loans" refers to specific types of loans for college education or closely related expenses provided through or regulated by the Federal government. While interest rates on student loans may be more closely regulated or scrutinized, inconsistent or late repayment of student loans can lead to substantially higher fees.

Deferment

Deferment of loan repayments does not always stop the loan from accumulating more fees.

Other Situations

You can speak with a Noble Navigator if you are unsure about student loan cancellation programs and eligibility.

Medical Debt

Introduction

Medical debt is any debt owed to doctors, hospitals, care facilities, medical device leasing companies or similar providers of healthcare and related services.

Bankruptcy

US Consumers report medical debt as a primary driver of entering into bankruptcy. You can speak with a Noble Navigator about debt negotiation, debt consolidation and bankruptcy.

Secured Debt

Auto Loans

Auto loans are "secured" debt. Your ability to repay the loan is "secured" by the car itself If you are unable to repay the loan, the car can be repossessed by the lender and then sold at auction to recover the money initially loaned to you.

Fees

Auto loans are well known to frequently contain a wide variety of different fees, confusing terminology and unnecessary products and services. If you have not looked carefully at the terms of your auto loan, it may be a good idea to get a clear understanding. You can speak with a Noble Navigator if you have questions.

Mortgages

Mortgages are "secured" debt. Your ability to repay the loan is "secured" by the home itself. If you are unable to repay the loan, the home is foreclosed by the lender and sold at auction to recover the money initially loaned.

Fees

Mortgages have many different types of fees including origination, application, underwriting, processing and administrative fees. Many fees are assessed at the beginning of a mortgage but some types of mortgages have terms that can change. If you do not have a clear understanding of your mortgage terms, it may be helpful to review. You can speak with a Noble Navigator if you have questions.

Additional Topics for Review

Penalties

Some situations can automatically increase the cost of your laon. Paying late or missing a payment will typically increase your interest rate and may change other parts of your payment calculations which cost you more money.

Credit Score

The term "credit score" generally refers to a US Consumer credit-worthiness rating system operated by several US corporations. Scores range from 350 - 850 and are determined by the company’s analysis, based on information available to them. Lower ratings indicate that companies assess the borrower may be less able to repay money that is borrowed. Information collected and analyzed includes, but is not limited to, your bill paying history, number of active accounts, current amount borrowed and other borrowing patterns.

What you stand to lose

Money

Borrowing money at unfavorable interest rates and paying it back over a long period of time can cost a lot more than it seems. $10,000 in credit card debt that takes 20 years to pay back will cost $30,000 in interest at today's average rate. Everything purchased on the card costs 3 times as much.

Time

Using a credit card and then paying the minimum due increases the fees that you pay. Taking a long time to pay back credit card debt can turn it into 200%, 500% or more. If you work for your income that may mean. you need to work 200% - 500% longer to pay back the loan.

Peace of Mind

Losing or wasting time and money can be very disruptive. If you are unable to effectively manage debt and handle money it can affect your ability to pay your bills, own a home or save for retirement.

Member Services

Noble Navigators provides guidance, direct action and ongoing support services for more than a dozen important life situations, including providing care for others. If you or someone you know needs assistance, please contact Noble Navigators 24/7 for live assistance

Behind the Scenes Information

Many people who borrow money may not have a clear sense of the true cost of borrowing over time.

Key Terms

Principle

The principle is the amount of money initially borrowed.

Debt to Equity Ratio

The amount of your debts compared to your assets (debts divided by assets).

Interest payments

Fees based on an interest rate charged to a borrower for a loan.

Interest rate

A percentage of the amount borrowed used to calculate the interest payments.

Compounding

Compounding refers to how frequently the interest is calculated over the life of the loan and can greatly affect how much interest is paid over the life of a loan. Loans are frequently compounded monthly, daily or "continuously".

Lenders

Organizations that profit by lending it to people or organizations by collecting interest.

Minimum Payment

The minimum payment due reflects the minimum amount a lender will accept to consider the loan payments "current". The payment may be a fee to delay payment of the loan and not reduce the principle.

Cost of Money

The "cost of money" is a way to think about or describe how much it costs to borrow money.

Collateral

Assets such as a car or house can be treated as "collateral" which the lender can repossess and sell if payments are not made for an extended period of time.

Secured Loan

Loan repayment is "secured" by the value of the property or collateral which will be repossessed or foreclosed and sold to repay the loan if you are unable to repay it.

Unsecured Loan

An unsecured loan is not dependent upon any assets that can be seized if you fail to make payments.

Default

Defaulting on a loan typically means that you have not made payments for an extended period of time and have violated the terms of the loan.

Revolving Debt

The term "revolving debt" refers to debt like credit cards where you can borrow and repay incrementally.

Foreclosure

Foreclosure is a term that describes a default specifically for mortgaged properties.

Bankruptcy

A legal and financial process to achieve limited financial relief from creditors.

Terms

The terms of a loan contain things like the interest rate, compounding frequency, penalty for late payment and minimum monthly payments.