Debt management | Loans and debt | Financial Literacy | Khan Academy

- [Instructor] Let's say
that you have three loans,

$5,000 at a 9% interest rate,

$10,000 at a 19% interest rate,

and $100,000 at a 7% interest rate.

And let's say that the
monthly payments here

are becoming very difficult.

Let's say that payment is over $1,000...

Let me write 1K to be consistent.

Over $1,000 per month.

And for various reasons,
you're having trouble

paying for housing, and
for food, and for gas,

and these other payments
that are over $1,000 a month,

maybe you lost your job,

or maybe something else is
happening in the family.

So the focus of this
video is what do you do?

How do you actually try
to manage your debt?

Well, the first place to think about

is take a hard look at your budget.

Where are you spending money?

And actually, if you can look
at your sources of income,

obviously if those could
increase in any way,

that would be great.

But usually, for people focus on expenses

and how you can reduce those expenses

and figure out which
of those are must haves

and which of those are nice to haves.

Now the other thing that is good to do

is not to just put those
bills under a mattress

or throw them away and pretend
that they're not there.

Communicate.

You can communicate with your creditors,

these are the people that
you owe the money to.

You could also communicate to
other people in your family.

Maybe they could have advice

on how you might want to approach this.

And when you think about
how you wanna approach this,

we already have videos on debt repayment.

There's different methods.

Sometimes one is called
the snowball method,

where you start with the
lowest amount of debt first,

which in this case would
be the $5,000 loan,

maybe this was for a car that you bought.

And that's psychologically powerful

because you can get rid of that debt

faster than you can get
rid of these other debts.

The more rational thing to do

is pay off the most expensive debt first.

So that's this one right over
here. That's 19% interest.

Maybe that is credit card debt.

And maybe the one that you pay off last

is gonna be the one that's
lowest interest rate.

In this case, let's say that
$100,000 is mortgage debt.

But either way, budget,

so that you have as much money as possible

to try to make the payments

and then hopefully pay
down some of this debt.

The rational thing is pay
the highest interest first,

but sometimes psychologically,

it might be valuable to just
get some of it out of the way,

so pay some of the lower ones first.

You can think about which
one you would rather give.

Now, another thing that you
can do in certain situations

is consolidate your debt.

Consolidate your debt.

What this means is, you might
be able to take out a loan

that you can then use to
pay off these other loans.

So let's say your house is
worth a lot more than $100,000.

You might want to take out a $115,000 loan

against your house.

So you are refinancing your mortgage.

So you take out 115,000 and
maybe you can get that at 7%,

and then you can use that
to pay off all of this.

That has two potential benefits to it

if you have that at your disposal.

One is you're getting
that low interest rate

across all of your loans now.

And then also, you now only
have one loan to service.

But let's say that you
don't have access to this

or for whatever reason,
you're just not able to pay

and you communicated with the lenders

and they're not so
sympathetic to your situation,

well then you can start
going to third parties.

You could go to credit or debt counseling.

These are typically run by nonprofits.

And if it's a for-profit,

you should be a little bit worried,

or not worried, but you
should at least think about

how they're making money and
whether they are legitimate.

But especially many of the nonprofits

that are trying to help
people manage their debt,

they might figure out ways that,

well, maybe you could consolidate,

maybe you can budget in a certain way.

They might help you come up
with a debt management plan.

Now there's other groups,

and these tend to be for-profits,

that will focus on debt settlement.

The people who are lending you money

would rather get something than nothing.

So many of these players

will try to negotiate on your behalf.

They say, "Hey, Sal's not in
a position to pay $115,000.

Wouldn't you rather just get $100,000

than get nothing at all?"

But be very wary of folks like this,

because you have to worry about
how are they making money.

Are they making promises to
you that they can't really do?

And then they're taking fees from you

and you'll never get your
debt actually settled.

Now, when things get tough, you might,

in fact, you will get
letters from the lenders,

and they're going to
focus on debt collection.

And debt collection can be very scary.

People are sending you these letters.

They could be very strongly
worded, first and foremost,

and they can even call you on the phone.

Be very wary that it is actually
someone you owe money to.

So be very wary of scammers.

Don't give information.

Ask them to say, "Hey, well
if you say I owe you money,

what do you know about my loan?"

Make sure that they're
actually one of these parties

that you owe money to,

and they're not just trying
to do identity theft.

But once again,

you need to talk to them about
what is possible, what's not.

You can go to some of these
other lines of action.

But depending on the type of loan,

they're going to start
hitting your credit report,

which is gonna make it
harder and harder for you

to not only get loans, but to get a lease,

to rent out an apartment,
et cetera, et cetera.

If any of this debt was secured,

let's say this was secured
by a car over here,

you might've heard of the repo man.

In the middle of the night,

someone might come and take that car back.

If this is secured by a house,

then they might start
going into foreclosure

if you're not able to pay that one off.

So that's another thing to think about.

Which ones are going to have
the highest stakes for you

if you're not able to pay them off.

And in the last resort,

you have bankruptcy.

And this is where you essentially
negotiate with a court.

You're saying, "Look, this is just

an unsustainable amount of debt."

And then they will work

with all of the people you owe money to

to come up with a different plan

or maybe a different amount of debt.

But be very careful.

Any of these situations

where you start defaulting on your debt,

and especially when
you go into bankruptcy,

these will really hurt your credit.

Hurt credit.

And credit is not easy to repair.

It takes many years.

It goes up a little bit at a time.

You have to have many
years under your belt

of paying things off,

regularly paying, making
all your bills due.

So it can take seven, eight, nine years,

especially if you do
something like bankruptcy,

to get your credit back
to a reasonable place.

So this is really
something of last resort.