Paying off your debts is a complicated thing to do. Depending on the quantity of debt you carry, making all of it go away can take many years and for homeowners with a limited budget, this is simply out of reach.
An excellent solution to achieve debt relief, is to consolidate your debts. By doing this, you relieve financial anxiety, and make your debts more manageable; allowing you to pay off all your existing debts more easily. But how can debt consolidation help you manage your debts wisely?
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Things to Know About Debt Consolidation
First of all, it is always good to remember the rule: “Don’t spend more than you earn.” This money mind-setting prevents you from getting out of control with your expenses and eliminates the chances of getting into deep debt trouble. But as always, things are easier said than done.
How can we do this? Since we live in a modern period, there are numerous options that allow you to manage and deal with your finances with ease. Multitudes of options are available – from low interest rate personal loans (secured, unsecured, home, payday) to credit cards. All you have to do is be responsible and see to it that you abide by the rules you have set for yourself.
Debt consolidation transfers your debts and helps you take on a new loan to cover all of your present debts and expenses. Take note that the loan amount you took will always be higher. Because of the loan you have obtained, you will be able to pay out all your debts which put a stop to your problems. People who have been using debt consolidation have been known to get out of debt in less than 4 or 5 years.
However, you must understand that debt consolidation does not eliminate debt; it only reduces your debt amount to a controllable amount. It helps you handle your debts in a more proper and organized manner.
When you consolidate, you get a loan and you still have to pay the money back from the loan you availed. Although the payment procedure is much simpler since you only need to pay a set amount once each month.
Advantages of debt consolidation
Consolidating all of your debts brings some significant advantages, including:
- Single payment per month – It can be really hard to cope up with several creditors all at the same time, you can overlook and miss payment deadlines which can incur late fees with high interest rates. By opting for debt consolidation, you can choose the day your bill is due lessening your hard and oftentimes tedious task organizing your finances.
- Saves you money – When you use debt consolidation, lower rates of interest are offered to you which helps you pay off your debts quicker. You can even save up to 50-60% of your income because of the low interest rates.
- Breathing space – The term of repayment will be longer thereby provide you with a fair bit of breathing space.
- Avoid bankruptcy – Filing for bankruptcy is certainly the last option that you can resort to. People who practice debt consolidation have lesser chances of going bankrupt.
- Repair your credit account – Delayed payments, high amount of debts, garnishments and failure to pay all lead to a bad credit rating. By using debt consolidation, you will be able to slowly eradicate your poor rating and improve it through time.
Five ways to consolidate your debts:
When you face debt issues and fall behind your schedule you tend to think what could have probably gone wrong with your promise to do whatever it takes to manage your debt and get rid of it. Well, there seems to be one and only one problem: you do not know how to do it.
- The first step is to make a list of your debts and prioritize these to know which are the high interest ones that you want to consolidate
- The next step is to decide which the best option for you is.
Ideally, the most effective and feasible way to get rid of any type of debt irrespective of the type of debt is debt consolidation. So, we have made this list of the 5 strategies and techniques that you can use to shun away from these dreaded debts.
1. Get the right loan
Right at the outset it is important that you have chosen the one that best fits your financial and debt situation. It starts with choosing the right type of loan to get your debt under control.
- The loan should be a low interest debt consolidation loan so that you do not end up paying more on interest. Remember, even a low rate of interest can prove to be costly in the end if the loan term is longer. Therefore, balance the rate of interest and the loan term with your needs and affordability to repay it without any defaults.
- It is also important that you choose an unsecured debt that will not have any collateral attached which you may lose due to non-payment.
In addition to that, you must also make sure that you choose the right type of debts that you want to consolidate with the new loan. Ideally you would look at unsecured debts like credit cards, medical debts, personal lines of credit, and department store credit cards, because unsecured debts always carry a high rate of interest with them.
If you do it right, this approach will help you to improve your credit rating as well as make it easier to repay your debt with low monthly payments.
Mortgaging your car, land, house or any asset that can be mortgaged is the simplest means of consolidating your debts.
This works by refinancing the asset you intend to mortgage. It may sound complicated but it is a very easy and simple idea. Your new mortgage (the asset) pays off your total remaining balance.
You use more money from your new mortgage than you owe on your present loan. The total difference of the amount you borrowed and owed is the cash you will obtain at closing; this cash is the one that will be used to pay off all your existing debts.
3. Opt for balance transfer
If you have a large number of credit cards and amount of credit card debts, then a second option is to transfer the balances of the existing cards into a new credit card (aka a balance transfer credit card). This card once again should have a lower rate of interest than the average rate of interest of all your credit cards combined.
- It is only have lower rate of interest you will have a lower monthly payment which in turn will help you to save a lot of money on interest.
- It is even better to choose a new card that has a 0% interest for a specific time, usually 18 months. This means you will have much lower monthly payments and much more savings.
However, you will just have to make sure that you pay off the balance within the introductory period.
4. Consumer credit counselling
Seeking help from a debt consolidation counsellor is a great answer to your financial worries, since they are professionals who’s main goal is to help you. They help you plan a budget system that works, look where your discrepancies are, find a solution to your woes and negotiate with your creditors.
This is another excellent way to consolidate debts because you will not need to borrow any money. It involves:
- Contacting a non-profit consumer credit counselling agency
- Have your finances thoroughly reviewed by an efficient counsellor and
- Create a better budget or a debt management plan.
Such a DMP will consolidate all your unsecured debts. You will not pay your creditors any longer. Instead, you make a monthly payment to the consumer credit counselling agency. They will disburse that money to your lenders.
5. Debt settlement
This is the most popular option since the Great Recession of 2007. There are several reasons for this such as:
- It saves a considerable amount of money by paying much less than the balances
- You can consolidate debts by creating a fund first in an FDIC-insured trust account instead of paying the unsecured lenders every month
- This process usually takes 24 to 48 months to complete depending on the amount of money you owe and agreed to pay.
Therefore, make sure that you choose the right debt consolidation option but also make it a point that you consider the consequences that may vary according to the specific option chosen.
Avoiding debt consolidation scams
Just as there are different debt relief options that you can choose from, there are also a large number of debt relief companies that provide such services. It is therefore necessary that you only choose a reliable and legitimate company. There are several debt relief companies that are absolutely legitimate though there are a few scam companies as well. This is why you are advised to research well before you choose one.
As it is, you have fallen behind your schedule and have made the situation worse falling out of your pledge and struggling with your debt. You surely will not want to make it worst by selecting a scam company that will take and run away with your money leaving stranded in the middle of nowhere. The increased stress and fees and interests will make you physically as well as mentally sick.
Therefore, there is no other alternative than to choose the best debt relief company. This will help you to:
- Come out of the debt hole
- Regain control of your finance
- Manage your debt easily
- Maintain your physical and mental health as well as
- Control your life and relationships.
Yes, financial problems and debt issues can cause different other issues such as psychological troubles, health problems and even strained relationships.
This was just one of many other money saving ideas that we have for you. If you want to find out more ways to save money, check out our list of additional ways to save money.