If You Are Thinking Of A Debt Consolidation Plan, Read This
Are you having multiple debts that it’s getting hard to keep up with the monthly repayments? Are you tired of writing several checks to different creditors and still not seeing any changes on your loan balances? Well, debts are financially crippling, but sometimes they are inevitable. When they pile up, it becomes even more difficult to clear them as fast as you’d wish to. Imagine a scenario where you have medical bills here, a student loan there, and several unsecured debts that all need to be cleared on your monthly income. Failure to clear them would also attract penalties. Consolidating your debts would make it much easier to manage and pay off your multiple debts on time.
So what is debt consolidation?
This is a debt management plan that involves making a conscious effort to repay your debt using a consolidated loan, a debt settlement plan or a debt management program. Each method has its pros and cons, it is therefore important to choose what works best for you.
You should not see debt consolidation as a quick fix, but rather a long-term strategy that helps you get out of debt faster. If you use this means of debt management correctly, you can get out of debt faster, lower your interest rates, protect your credit scores, and reduce your monthly payments.
How debt consolidation works
Below is a step-by -step guide on how to consolidate your debt:
- Add up all your debts – adding up the total amount you owe will help you do comparisons. Debt consolidation can only be effective if it lowers your interest rates and the monthly repayments. Calculate the average interest rates and all the monthly card payments.
- Check your budget – a budget will guide and help you decide whether to consolidate your debts or not. What is your income? How much do you spend on a monthly basis? An income that is higher than expenses is an indication that you can easily handle your debt without consolidating it. If you need advice on how to make a budget, talk to a credit counseling agency.
- Choose what works – you can consolidate your debts in three ways: debt consolidation loans, debt management program, and debt settlement. Weigh all the pros and cons of each method and choose what caters to your needs.
- Be patient and commit to paying off the loan – it is important to note that debt consolidation is not a quick fix or debt elimination. Debt consolidation loans and debt settlement take 3-5 years to clear while debt management programs take around 3 years. Compare the loan term, monthly repayments and the interest rates. Choose the most affordable option.
Who is eligible for debt consolidation?
The qualifications for debt consolidation differ from lender to lender. It is, therefore, important to do thorough research or seek advice if you are thinking of consolidating your debts because some qualifications may end up being costly.
The major requirements are:
- Equity/security – if you have home equity as collateral, then you are likely to get a larger loan to help you pay off your debts because. Lenders will view you as a less risky borrower.
- Credit history – most lenders will perform credit checks and obtain reports on your credit scores. If you are poor in paying off your debt, then getting financial aid for consolidating your debts may be a problem
- Proof of income – lenders will want to know if you have a source of income that will service the loan. If you are employed, you’ll have to produce payslips. Business owners produce bank statements to show their cash flows.
- Financial stability – are you able to service your loan and still have enough to carry on with your life. Lenders want to ensure that you will not default on payment because of shaky finances.
Benefits of debt consolidation
If you are greatly immersed in multiple debts, consolidating your debts could offer an easy and faster way out.
Some of the benefits of debt consolidation are:
- Helps rebuild your credit score – late payments will definitely hurt your credit score. If you focus on one loan instead of the outstanding 5 or more, you’ll be committed to making prompt payments. This will help you build your scores.
- Makes you avoid collection calls – normally when you default on payments, lenders will forward your details to collecting agencies. You will receive their calls every day asking when you will pay off your debts. It sucks, right? Debt consolidation helps you avoid those nagging calls.
- Reduces stress – nothing sucks like having so much debt. It could be a stressor that makes it difficult for you to concentrate on other important areas of your life. Debt consolidation helps you put your finances in order with an aim of paying off your debt faster.
- Low interest rates – lenders charge high interest on unsecured loans. Debt consolidation makes it easy for you to clear off your debts cheaply. These plans are meant to reduce your interest rates, repayment amounts and prolongs the repayment period.
- A single payment – instead making several payments to different lenders, you make a single payment towards one loan. This makes it easy for you to clear off your debt much faster.
- It doesn’t eliminate your debts – they don’t clear up your debts or help you change the things that got you into huge debts. You simply are taking out another loan to clear up piled up bills. Meaning you didn’t solve anything instead you just prolonged your problems. Knowing how you got into your current predicament should be your first step to solving your debt issues.
- It could affect your credit ratings – a debt settlement plan may affect your credit score in the long run. They hold your money in an attempt to negotiate better repayments with lenders who may end up rejecting the offer. The accumulated interest and penalties may affect your credit history.
- You could lose your home – if you used home equity, chances are you may lose your home if you don’t keep your end of the bargain. Taking secured loans means that your property is always on the line if you don’t stick to the schedule.
- It’s costly in the long run – don’t be fooled by the flexible and extended repayment periods. The longer the loan term, the more you will pay on interest. It is important to clear off your debts as fast as you can to avoid paying more.
- It could plunge you into more debt and you will be indebted for a long time.
Other options of settling your debts
The sad truth is that no matter how debt consolidation promises a way out of debt faster, it’s never a guarantee that it can work for everyone. Instead of looking at it as the only option out of debt faster, it is important to pursue other options such as:
- Personal loans
- Online lenders
- Credit card balance transfers
- And other secured loans
A comparison of the different methods of debt consolidation plans
You can consolidate your debts in three different ways:
Debt management programs
This is a debt management strategy that involves a credit counseling company negotiating with your lenders to lower your interest rates, monthly repayments, and waiver or reduce all the fees and penalties. The credit counseling firm and your creditors agree on a workable formula that involves you making payments every month which is used to pay off your debt according to an affordable predetermined schedule. The lender and the firm use your income vs. expenditure to work out a repayment schedule that you are comfortable with. It’s one of the best ways of managing your debts, and it doesn’t involve taking out a new loan. It also helps you make a realistic budget and helps you organize your finances. With consistency and discipline, it can take 3-5 years to clear your debts.
Debt consolidation loans
It’s a plan that involves combining all your unsecured debts into one loan with the hope that you will get reduced interest rates and monthly repayments. This plan is not a quick fix and it doesn’t eliminate your debts nor does it help in financial behavior change. Essentially, you are repaying your debts using another loan which you must repay.
It’s important to access your ability to make payments every month towards your new loan before consolidating your debts using this plan. It requires discipline and commitment because defaulting could make you lose the property you put as collateral. One major advantage of debt consolidation loans is that you can now direct payment to one lender instead of several lenders. Do your research well, weigh all the options, and consider if it’s affordable and offers some relief before getting into this plan.
This plan involves debt settlement companies negotiating with your creditors on your behalf to make a lump sum payment for less than what you owe them. It seems lucrative but most lenders don’t accept such offers and it may also affect your credit scores in the long run. The plan is to deposit money every month with a debt settlement firm, and then when it reaches a certain dollar mark, the firm pays it off to your creditors. Since this may take several months, you risk paying more on the accumulated interest and late penalties if your lender doesn’t accept the offer.
Some settlement firms are scams and may abandon you with your debt after collecting their fees. Ensure that your debt is fully repaid before paying any fees. The best way to get out of debt fast is to organize yourself financially and change the behavior that led you to a pile of debts. Using debt consolidation loans or debt settlement plans don’t eliminate your debts, they only prolong the repayment period. It’s more expensive and you risk losing properties you put up as collateral.
If you still choose to use debt consolidation loans, we can help you get the best deal that will not hurt your finances. Fill in our simplified loan application form online and let us walk with towards financial freedom. We make it easy for you to connect with qualified lenders who will not only offer you financial aid, but help you get your finances in order.
Rudi is a credit analyst who writes articles about credit scores, building credit, and consolidating debt. His know-how on poor credit and credit unions make his input invaluable to our company. There is no credit score out there that Rudi can’t help with.