If you have run up multiple debts and now struggling to service them by making the monthly payments on time, consolidating your debts can be a very effective strategy. The process comprises aggregating all your debts to arrive at the total debt and then taking a loan for the same amount from a different source to enable you to pay off your creditors. In exchange, you now have just one debt that carries a lower rate of interest and requires an amount to be repaid every month that is more affordable. There are various steps to implementing a debt consolidation strategy that can be effective in getting you out of your financial mess.
When Is Debt Consolidation Required?
Most people start considering debt consolidation when they realize that they have taken on debt from too many sources and are unable to make the payments on time either because they are incompetent to monitor them effectively or lack the financial resources to make the monthly payments on time or even both. Not paying your bills on time results in your getting charged with penal fees as well as a high rate of interest on the sum outstanding. Also, the defaults end up damaging your credit score.
When you have consolidated your multiple debts, you need to make just a single payment every month, and this is far easier to remember and arrange. You should appreciate that sticking to a repayment schedule takes a lot of determination and hence you should repay your entire debt within a period of five years maximum. Anything beyond five years means that you end up paying a huge amount of interest that you could have saved by opting for a shorter tenor.
Steps In The Process Of Debt Consolidation
Debt consolidation has always been popular with people who have got embroiled in a financial mess because the process is simple to understand, you need to monitor only one account, the upfront fees, and interest rate are relatively lower, and the application and approval process can be quite quick. The principal steps of getting a debt consolidation loan are:
Checking Out the Status of Your Debt: It can be an overwhelming feeling to be in debt, however there’s no way you can get out of the mess unless you conduct a thorough review of your debts so that you know exactly how much you owe and to whom as well as the applicable rates of interest and the amount required to be paid back every month. To do this you need to include not only just your credit card debts but also all the other unsecured loans such as personal loans, business loans, student loans, etc. Totaling up the monthly payments will give you an idea what the surplus will be of your monthly income that can be applied to living expenses and paying off the monthly dues on your secured loans such as the mortgage and car.
Identifying a Suitable Consolidation Company: It is vital that you select the best debt consolidation company as otherwise you can end up worsening your financial situation by getting involved with an unscrupulous company that will rip you off with high-interest rates and fees and charges in various guises. To locate a professional, reliable, and ethical finance company from whom you can get the loan, go online and read as many debt consolidation reviews as you can so get an idea of the applicable interest rates and the sort of complaints against them that will arm you with enough knowledge to pick the best of the lot.
Choose the Right Debt Consolidation Plan: You can apply for either an unsecured personal loan or a secured loan by offering your home as a security. The home equity loan has the advantage of carrying a lower rate of interest but you run the risk of losing your home in case you default. Usually, most people opt to take the personal loan route even though the interest rate is higher.
Settle On a Repayment Schedule: By doing a thorough financial analysis of your income and expenses, you will be able to know how much you can afford to repay every month. With the help of the debt consolidation company, you can work out a repayment schedule that takes this amount into consideration so that you can settle the loan in the shortest possible time so as to avoid paying the extra interest that becomes applicable if you stretch out the tenor. It is important, however, to ensure that the repayment plan is reasonable and practical.
No amount of planning will get you out of debt if you are not prepared to be disciplined and make the changes to your lifestyle that will eliminate profligacy. Once you have selected a plan, be prepared to stick to it and you will see that good financial habits will automatically become a habit and unmanageable debt a thing of the past.