Debt consolidation is one of the most favoured strategies to tackle bad debts that have grown to insurmountable levels.
Personal finance advisors and insolvency experts alike recommend this as an effective way to regain control of the debt situation in dire straits when the liabilities are increasing at an alarming pace, leaving no more room for delay in tackling the issue head on.
The goal of debt consolidation is to ensure that you enhance your ability to pay down the debts as soon as possible, thus reducing both the intensity of the debt burden and its duration.
This is one of the most efficient ways to handle bad debt however, many people are still quite wary about using this strategy when their finances are in such poor state that the unpaid bills are rising on a daily basis simply because they do not have a clear idea of what it involves.
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When should you be thinking about debt reduction strategies?
Ideally, you should be thinking about it well before your debt gets out of hand and unmanageable.
However, the scary fact is that most people do not realize that they are quite deep in the debt soup until well after they are in so far that they find it difficult to keep the head above water.
Interestingly enough, the same people may be well aware that they do have a poor credit score.
There are quite a few signs to ring warning bells when you are looking at a poor credit score.
One, you may be getting calls from collection agents rather frequently with reminders to pay your bills.
Two, you may have trouble getting new loans because lenders keep turning you down.
Three, you see that the terms offered to you even if you do manage to get a loan are very different than what others (with sound financial records) may be getting.
Four, you are missing payments or making late payments too often.
A quick check of your credit score is warranted in any of these situations and if your score is poor, you know that you need to take steps immediately to handle your debt situation in particular and financial situation, in general.
Why debt consolidation?
Debt consolidation is a good strategy to adopt to tackle your debt issues because it makes the repayments process simple and seamless.
One of the biggest reasons why many people lose control of their finances and mount up debts is that they are unable to keep track of what all they owe.
By consolidating all your outstanding debts into one single debt, you have just one loan to worry about and track so that you do not miss out any payments at any time.
Consolidation gets your debt situation organized and streamlined so at any point of time you know exactly where you stand.
That is quite empowering in itself.
Apart from the convenience factor, the single most appealing thing about debt consolidation is that it can help you lower your interest rates and thus reduce the financial burden that your debts are exacting upon you.
A consolidation loan chosen with care, with the advice of insolvency experts can make it far easier for you to become debt free sooner than you might think it is possible.
That is the ideal situation for you in the given circumstances- to eliminate all your debts systematically so that you can bring your financial life back on track.
How do you go about getting a debt consolidation loan?
The first step is for you to apply for a loan to consolidate all your outstanding liabilities into one.
To do this, you need to have a very clear, very accurate picture of exactly what debts you have open and unpaid.
Start by making out a comprehensive list of all your debts, mention what it is for, whom do you owe it to, when should it be paid and how much.
The list needs to be exhaustive so undertake a check of your credit report to see if you have missed out any unpaid dues.
The next step is to make a realistic budget that you can live on until you pay off all your loans.
Factor in all your basic living expenses, the expenses that you don’t have a choice but to undertake.
Now you know how much money you need in order to carry on normal life.
The rest of your income can be used to pay off your new loan once you consolidate all your debts under it.
Keep in mind that the goal is to pay off the debts as soon as possible so you should be aiming at making the maximum possible pay offs towards debts even if you have to be frugal for as long as it takes and live on a bare bones budget that just covers essentials.
The sooner you are debt free, the sooner you can start spending more freely.
If you cannot figure out how to make a viable budget, you might need to take help from a debt counsellor.
Where can you get a debt consolidation loan?
This is another area where your insolvency expert/ advisor should be able to give you able guidance.
You can first approach your bank for the loan, especially if you have had a long relationship with them.
Your bank is familiar with your financial history/ habits and they know if you have regular income coming into your account too.
You might find the best interest rates from your own bank for a consolidation loan that is affordable for you even if your credit score is not great.
If you cannot approach your bank or they cannot offer a consolidation loan that is viable for you, then you need to search for other lenders.
Make sure to carefully read all terms and conditions before you sign up for anything so that you do not get any rude shocks at a future date.
Pay special attention to hidden fees that might drain your finances heavily.
If your poor credit score is a roadblock in your debt consolidation, then think of offering a collateral, such as your home, or asking for a family member or friend to co-sign the loan with you.
Getting a co-signor who has a very sound credit score and financial history can ease the terms offered to you significantly.
But you should be doubly sure to pay back on time else your co-signor’s credit score is impaired as well.
Points to watch out for
When you are opting for a debt consolidation loan, there are a few factors that you should always have at the back of your mind:
- Carefully pay attention to the TOTAL cost of the loan over its duration and not just the monthly pay outs. Remember that a consolidation loan does not reduce the total you need to pay, it just lowers the interest, provided you find the right one. You do not want to take on a loan that results in you paying more than what you originally owed on your outstanding debts.
- Think well before you sign up and ensure that you can afford to pay the loan’s monthly instalment without fail. You don’t want to default on your consolidation loan and worsen your existing situation.
- If possible, keep some money aside for contingencies so that in event an emergency crops up, you are not forced into a debt cycle yet again. Even the smallest of emergency funds will do, provided you set aside money regularly towards it.
- Change your spending habits and ensure that you leave behind any that have been responsible for your excessive debt situation. For example, if you over spend using credit cards, stop using them entirely and avoid temptation but cutting them all up.
- If you are unsure that a debt consolidation loan is the right strategy to adopt, check with an insolvency expert and ask them about other options. The expert can review your financial state and tell you which is the best strategy for you.
Debt consolidation allows you eliminate your mounting debts by making the interest burden lighter on you and by streamlining the repayment process and structuring it over a longer duration.
You get a leeway with this kind of loan to pay back your debts.
While you are paying the debts off, the consolidation loan ensures you still have a cash flow to run your daily life with as much freedom as the severity of the debt situation will permit.
The bigger goal here is to become debt free completely without causing a lot of disruption to your life so do not get diverted into focusing ONLY on how quickly you can pay the new loan off.
This could push you into yet another debt that you find yourself unable to pay off.
Pay attention to details, learn what the debt consolidation loan requires you to do, understand all its terms and conditions before you sign up for one so that you end the vicious cycle once and for all!