Home / News / 5 Steps of Effective Debt Consolidation

5 Steps of Effective Debt Consolidation

Recurring and ever increasing monthly debts! How do you deal with them? Are the loans and debts you are currently servicing frustrating you? Is you financial state dire and are you in need of a better monthly repayment plan? Well, have you considered debt consolidation?

For starters, debt consolidation is a debt relief strategy that will be suggested to you by your financial consultant if you are struggling with various monthly repaid debts. How does it work? Debt consolidation, as the name consolidation suggests is the process of combining all your debts or loans into one and repaying or servicing one loan. Basically, you take a loan to repay all the loans then remain with one loan that you will service monthly at a lower or a manageable interest rate.

When do you need to take a debt consolidation plan?

  • When you have many debts to repay

Let’s say you have to repay various credit card debts, personal and student loans, but you find that your finances are run down by these loans. Then, you may consider taking up a debt consolidation plan.

  • When you need better management and organization of your bills and loans

You know how sometimes you have many bills to settle and loans to repay, and then you forget to pay one, affecting your credit score? Consolidation helps you do that too because you have one loan to repay rather than 3 or 5.

  • 5-Year repayment

It is a preferable debt management process when you believe and you know that you can repay your loan within 5 years or by the end of the five years.

Debt consolidation is also a preferable method of debt management because the repayment interest rates are lower, you get to keep and manage one account, there are low upfront fees charged, and it has a simple application and approval if you have an excellent credit score.

If you qualify for debt consolidation, then which steps are involved?

The five main steps involved in debt consolidation include:

  1. Checking out your debt status

Being in debt is overwhelming and the feeling gets worse when you have to review all your loans and outstanding debts. However, this is the first step of the process and you have to analyze your debt standing.

Prepare a comprehensive list of all your debts, the total value of the debts, the interest rates, and the monthly repayment rates. To help you out, list the credit debts in your account, the personal loans, student loans, and your business loans. Generally, put all your unsecured loans in that list (the loans not taken against collateral).

Once you have listed what you owe, you should then create a column with all your monthly obligations. Once you have listed these, you will begin to get a clearer picture of your current financial status in relation to what you owe and your expenses, and the residual amount of income monthly, if there is any.

  1. Find a suitable debt consolidation company

By this time, you will have noted how bad your financial situation is and you should therefore find a debt consolidation for bad credit plan that will suit your financial situation. If you are unable to calculate the estimated amount of your debt consolidation loan, then you should talk to a financial counselor.

There are various debt consolidation plans and companies online and you will not miss one. Check out online reviews for debt consolidation companies that you can work with, alternatively, your financial counselor can help you pick the best company for you.

  1. Choose a debt consolidation plan or option

After finding the right company, then you should choose the right plan under which the loan will be repaid. The two most common options are: use of your home equity and use of personal loans.

Home equity plan: by using your home equity for debt consolidation, the charges of interest rates will be low. However, this will only be possible if your remnant mortgage payment is less than your debts. You may also choose to pay the principal or use your home equity through its value of appreciation.

The other home financing options include cash-out refinancing, taking a home equity loan or a second mortgage, or home equity line of credit.

Personal loans: this option works well for non-homeowners. Basically, you can take debt consolidation loan against your personal loan. Unfortunately, it carries higher interest compared to home equity.

  1. Set a repayment time plan

This requires some more math, but with the help of your financial consultant, you should be able to come up with an attainable repayment timeline.

An important point to note is that you do not want to pay more by the end of the repayment period. Even with lower interest rates, you may end up paying more if the repayment schedule stretches for a few more months or years. You should therefore ensure that your loan repayment period is reasonable, attainable, and a duration during which you will have made some savings.

You should consider using the line of credit for home equity since this plan allows interest repayment rather than principal.

After setting the timelines, you should track your payments and progress and do all you can to stick to the set repayment schedules and time plans.

  1. Know associated risks and control your spending

When using a home equity option, there is a risk of losing your home if you are unable to repay your loan in time. Weigh your options well before committing to this as the preferred repayment option.

The only you can be sure of repaying your consolidated loan and not getting into debt after is by changing your spending habits. Identify your bad habits, and find little ways of saving up. The lower interest rates are already saving some money, so why not extend this courtesy by inculcating good spending and personal finance management habits?

 

In conclusion, management of debt isn’t easy and is always an overwhelming time. Debt consolidation will help in getting you out of the mess, but you will only be financially debt free at the end of it if you plan your finances prudently.