If you have an overwhelming amount of debt, you might be wondering what you can do to ease your financial burdens. Many people consider consolidation loans as a way to make their finances more manageable and to free up some discretionary income. At this point, you might be asking how you can obtain a consolidation loan.
To that end, consider this Debt Consolidation 101.
What is Debt Consolidation?
Debt consolidation is combining multiple debts to obtain one monthly payment. If done correctly, you can save both time and money. Your budget will be much easier to manage, as you’ll no longer have to decide what has to be paid this month and what can wait until next.
Usually, this one payment is lower than all of the other payments added together. Interest rates are often lower for the larger loan that it is on some of the individual debts. Over time, the lower payments and interest rates will save you money.
Preparing For Consolidation
So how do you go about consolidating all of your debt into one payment. Several different options exist, from a loan from a financial institution to a credit card balance transfer.
The first step in consolidating your debt is to take inventory of your debt. Gather statements from all your creditors. Make a list of each one and include the balance, the interest rate, and the monthly payments on them.
Credit card debt is the most common type to consolidate, mostly because of the high interest rates. You can also include personal loans, payday loans, and medical bills. Add up the totals for both the balance and the monthly payments.
Check your credit reports to see where you stand in terms of loan eligibility.
Debt Consolidation Methods
Some people take out a debt consolidation loan. A good place to start is the financial institution where you do your banking every month. Look at their options for personal loans and what the interest rate is. The lower the interest rate, the more money you will save.
One good thing about debt consolidation loans is that the accounts you’ve chosen to consolidate will show as paid on your credit report. Then, making timely payments on the debt consolidation loan will show current on your report, which is always a good thing.
Consolidating Credit Card Debt
If most of your debt is on credit cards, you could consolidate it by rolling it over to a lower interest rate card. Many credit card companies offer this as a means of enticing new consumers to them. Some even offer a few months of very low or no interest. If you do this, you’ll only have one bill to pay each month, but be wary. Some of those credit card companies can raise the interest rates to even higher than what you were paying before once the grace period ends. Make sure you can pay off the transferred balance before that happens.
Debt Consolidation Caveats
Debt consolidation loans do have some disadvantages. One of these is that even if the interest rate is lower, you will probably be paying for a longer period of time. This means the interest will be accruing over more time, which means you may ultimately be paying more in the long run.
Speak to your credit card companies to find out how long it will take you to pay off your debt at their current rate and then compare that to the debt consolidation loan you will be getting. It may not be in your best financial interest to consolidate with a new loan.
It’s also a good idea to curb your spending until you get your consolidation loan paid in full. Doing a consolidation does not eliminate your debt, it just moves it someplace else. Meanwhile, the accounts you transferred will show zero balances. A stack of zero balance credit cards can be mighty tempting. However, using them will only dig your hole deeper.
If You Don’t Qualify for Consolidation
So what do you do if your credit is less than perfect? What if you’ve had trouble paying your bills over the last few months, which has resulted in late payments and reports to the credit bureau? If your credit score is too low, you probably won’t qualify for an advantageous debt consolidation loan.
You’ll have to take a look at other options, which can be done by consulting with experts such as those at Stone Rose Law – attorneys here will provide thoughtful and knowledgeable guidance, and help to find financial solutions that are best for you and your family.
One of these is to go with a debt relief company, such as Freedom Debt Relief. These companies will negotiate with your creditors to settle your debt for a lower amount, in exchange for a one-time payment in full of the agreed upon settlement amount.
Conduct Your Due Diligence
Also be sure to research any company you go with, whether you go with consolidation loans, or the debt settlement option. Consult the Better Business Bureau to see if the company you are looking at has any strikes against them. A company that has been in business for a long time is your best bet. Looking at reviews online is also a good idea. Whatever you choose, it’s important to make sure you are going with a reputable company, because you don’t want to lose money in a scam.