In our lives, at a certain point, we all go through difficult financial situations, or at least most of us do. In this age, sustaining a good, stable financial state for a long period of time looks like an impossible task. Once the bills start to add up and you start to take out different loans to manage all that is going on around you, you can soon find yourself in a bad place. Having multiple debts is definitely not uncommon, in fact, most American families are carrying some debts. Once you realize that your debt is becoming a bigger problem, it is time to take some action.
How do you get rid of debt?
There are various ways to deal with your debt, depending on your specific financial situation. If you only need to take care of a single loan repayment, you may ask a friend or a family member to give you a hand. However, if you are dealing with multiple debts and taking care of a number of loan repayments each month while also trying to manage your regular monthly bills, the only solution to such financial problems is getting help. One of the most common methods for dealing with multiple debts is debt consolidation.
What is Debt Consolidation?
Debt consolidation is basically a financial method where you combine all of your existing debts (medical bills, credit card debt, payday loans, personal loans and others) into a single monthly payment. That way, instead of keeping track of a number of loan repayments that you need to make each month, you will be making just a single payment that will go to all of your creditors. Not only is this going to save you time, but it is actually going to make your life a bit easier. It is only natural that having to calculate and structure a budget while you have multiple loans to repay can be extremely hard and really stressful. However, when you only need to think about a single debt repayment each month, it is going to be a lot easier to manage your budget and live a normal life. Being able to focus on a single monthly payment will also help you make that payment on time, and therefore, avoid penalties from late or incorrect payments.
Different types of debt consolidation
When we are talking about consolidating your debt, you need to know that there are three main debt consolidation types:
- Debt consolidation loans
- Debt management plans
- Debt settlement
None of these debt consolidation types is going to serve you as a quick fix, but rather as a long-term strategy. They will ultimately help you reach your desired goal of getting rid of all your debts.
When debt consolidation is done in the right way, it can bring you benefits such as:
- Debt consolidation can lower the interest rates that you are paying
- Debt consolidation can keep your credit score safe
- Debt consolidation can make your monthly payments lower
- Debt consolidation can help you get rid of your debts a lot quicker
What is the best way of consolidating debt?
As we have already mentioned above, there are few different debt consolidation types. The best one for your specific financial situation will normally depend on the amount of overall debt that you owe. In case your overall debt is less than $3,000, probably the best way to get rid of it would be getting a credit card with a 0% interest and transferring your credit card high-interest balances to your new, zero percent interest credit card. Other option that you may consider include taking out a personal loan or getting a home equity line of credit. Other options that you can explore include taking out a home equity loan, refinancing an already existing mortgage loan or taking out a second mortgage. In case none of these options seem good for your specific case, you may try borrowing money against your life insurance or borrowing against your retirement savings.
In case you have multiple debts that exceed $3,000, probably your best solution could be a debt management plan.
Debt management plans
It is safe to say that most financial experts will advise you to use a debt management plan or a DMP as your first choice of debt consolidation methods. There are different organizations that provide debt management plans. However, the ones that are probably most beneficial for the borrowers are the non-profit debt management organizations. The first step that you need to take when going to a non-profit debt management organization is credit counseling. A credit counseling session can be really beneficial as not only you will get information about this particular debt management organization and its practices but after that meeting, you will have an overall better understanding of debt consolidation and how it works.
Debt consolidation loans
Debt consolidation loans or DCL, are loans that combine all your current debt that you want to consolidate. So instead of multiple loan payments, by consolidating your debts into a debt consolidation loan, you will take out a brand new, larger loan, usually with better terms (including interest) than the combination of all your current loan terms. That way, instead of making multiple payments to different loan lenders, you will only need to make a single monthly payment to a single loan lender, after that the money from that payment will go to all of your creditors. Having a fixed, lower interest rate for you debt consolidation loan will also mean that you are going to have a lower monthly payment, compared to what you are paying for all your current loan payments.