Are you drowning in debt but don’t have a clue on how to start paying it off? Debt consolidation is a tried and tested strategy that can help you cut down on debt, tweak your debt payoff habits, and ensure you don’t accrue more dues in the future.
Before you put a debt consolidation strategy in place, it’s important to figure out the type of debt you are dealing with. You need to figure out if it’s just credit card bills, medical bills, mortgage, or anything else; and find out how much you owe. Understanding the amount and type of debt can help you come up with a plan that is well-suited for debt payoff.
Remember, without debt, you can:
- Spend your money without a worry in the world
- Save money at a faster pace
- Give money to causes you care about
- Do work that you love instead of just worrying about paying the bills
You may have attempted a few paydown methods over the years, but if you’re like most debtors, you may not have stuck with the plan – either because it wasn’t engaging enough or your financial situation changed. Debt consolidation works so well because it helps you keep engaged since there is only one monthly payment to worry about.
Here’s how it works.
Tally Up All That Debt
The first step is to make a list of all the loans you have, including details about the repayment period, interest rates, and the lender. Now, list all your debts from largest to smallest. From there, you would sign up for a debt consolidation program where all your debt (usually credit cards) is combined into a single payment. It’s a good idea to get rid of the debt with high interest and then work your way down to the easier ones.
Sign Up for Debt Consolidation
Make sure to research all your options for lenders – from your local bank to an online lender. You can get two types of debt consolidation loans, secured and unsecured. Secured loans will require some form of collateral, such as equity on your home. Unsecured loans are not backed up by any collateral, and as such, will feature high interest rates.
Pay attention to the monthly payments, interest rates, repayment length, processing fees, and if there is any penalty for paying off the loan early. Make sure to compare the terms and rates of your existing debt with the debt consolidation loan.
A big advantage with debt consolidation plans is that the interest rates are lower than you are currently paying. In some cases, this may end up increasing the repayment length of your loan, which means you’ll end up paying more interest payments during the length of the debt.
If you end up paying more on the consolidated loan, you should ask yourself why you’re consolidating your debt in the first place. Is it to lower your monthly payments because you find it difficult to pay them each month? If so, try to cut all your extra expenses or supplement your income by finding a side hustle.
Create a Repayment Plan
Before you sign on the dotted line, try to figure out how you’ll pay the interest payments for each month. Look at your budget and see if there are expenses you can cut back on. This will help you decide which rates and debt consolidation plans to go with.
Cutting expenses is a good idea because it will free up extra money you can pay on your new loan. It also helps to find an extra job or side hustle such as tutoring or ride sharing to supplement your income.
The best types of loans to consolidate are credit card debts, medical debts, auto debts, personal loan, and the like.
Fees and Charges for Debt Consolidation Loans
Look carefully at the fees that some lenders charge for arranging a debt consolidation loan. Make sure to:
- carefully read the small print for any charges and extra fees before you take the loan
- check if the lender charges fees for paying off existing loans because this could cancel out any savings you were hoping to make
Make sure to shop around using comparison websites to get the best deal. It’s also important to take advice from a financial expert before you make a final decision.
Debt Consolidation vs. Debt Settlement
It’s common for people to be confused about debt consolidation and debt settlement. The two are not the same thing. Debt settlement is when you negotiate with the creditors to lower the payoff amount and to pay it right away.
Each approach works better for different financial situations. Individuals who have steady jobs and can make payments would be best served by debt consolidation, while those struggling to make their minimum payments each month and don’t find a way to financial freedom can seek debt settlement.
Qualifying for Debt Consolidation
It’s important to note that debt consolidation is a loan. It will be used to pay your existing debt and start a new lender-borrower relationship between the borrower and the lender.
This means you’ll have to qualify for the loan. Your lender will look at several evaluating factors, including:
- Credit score
- Interest rate on the debt consolidation plan
- Repayment time
Typically, borrowers with good credit will get lower interest rates on their debt consolidation plan.
These are complicated decisions that require you to seek expert opinion. Speak to an expert at Jacaranda Finance who handles these types of situations every day. This will help you arrive at a better decision on how to proceed with your debt consolidation plan – and if it’s worth seeking at all.
We’ve covered a lot in this blog. Now, you should have a better understanding of debt consolidation and if it can help your financial situation. The goal with a debt consolidation plan isn’t to saddle you off with more debt but to create a plan that helps you eliminate the debt quickly and within your means.
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