When there are more bills than money and you want to know how to consolidate debt, it’s time to take a hard look at options.
Bankruptcy is one option, but that’s a very serious decision with repercussions for years to come.
Learn how to consolidate debt, as this could be a better solution.
What are Debt Consolidation Loans?
First, what is debt consolidation? A debt consolidation loan is a new loan that is large enough to pay off existing credit cards, store cards, and unsecured personal loans. Instead of paying multiple loans every month, one payment is made on the debt consolidation loan.
Put Together a Budget First
There’s no point contracting for a new monthly payment amount that isn’t affordable. It’s important to know what monthly payment can be handled. The debt consolidation lender will require a detailed financial application, but there will probably be regular monthly expenses that aren’t reflected on the application.
Before starting the budget, have every member of the family carry a little notebook with them for at least a week and write down everything they spend. Doing this will highlight all of those small expenditures that add up to more than expected. Now put together a budget, looking for ways to save.
Don’t make the mistake of unrealistically low projections for estimated expenses. It’s usually possible to lower the monthly utility or food bills a bit, but expecting to cut them in half is unrealistic. Seeing a financial counselor could be very helpful.
Collect the Bills
For each credit card or other unsecured debt, write down:
- The total owed
- The interest rate
- The length of time to pay off
- Extra fees that are paid, such as yearly fees, late charges, etc.
Add the total balances to learn how large a consolidation loan is needed.
A Consolidation Loan Saves Money
- If the combined monthly payments on the unsecured debt were $1,000 per month, for example, the consolidation loan payment could be $600, a monthly saving of $400.
- Debt consolidation loans can be at a lower interest rate than the interest rates on the current unsecured debt. Over time, the savings on interest could amount to thousands.
- A debt consolidation loan allows for flexibility in the length of the loan. A larger payment would let one be debt-free sooner, while a smaller payment might fit the budget better.
- Making one timely monthly payment is easier and less expensive than paying late payment fees.
- Debt consolidation could lift your credit rating.
Options for Those With Bad Credit
Those who have multiple late payments, missed payments, or a prior bankruptcy can have difficulty obtaining a consolidation loan from many lenders. Some lenders, offer alternative solutions to debt consolidation loans for individuals with bad credit.
- For short-term financial difficulties, it may be possible to work out an informal arrangement with creditors. They may be willing to allow additional repayment time, freeze the interest, or settle for a portion of the amount due.
- A mortgage refinance, if there is sufficient equity in the home, could free up the cash to pay off the debts.
- A debt agreement is legally binding between a qualified debtor and creditors who agree to accept an affordable amount.
- A personal insolvency agreement is a legally binding agreement with the creditors, usually administered by a Registered Trustee.
- Bankruptcy is a last resort option.
The most important thing to realize when considering how to consolidate debt is that this is an opportunity to turn things around. In actuality, debt consolidation is both a business and a lifestyle decision. Read the contracts and ask questions until the terms are understood. Then follow through and build a better life.
Contact us today for your free no-obligation independent debt solutions advisory session.