Debt management is not easy. In fact, CNBC reports that the average American salaryman carries around $90,000 in debt—this consists of credit card debt, student loans, and mortgage, among other types of loans like the cup loan program.
High liabilities may be tolerable if you have the salary to back them up.
However, those who feel that most of their payments go toward the accrued interest might want to consider their debt consolidation options.
As the name suggests, debt consolidation is the process of combining all your existing debt from different creditors into one repayment plan.
This is a great way to get better terms on your loans.
If done properly, you could adjust the monthly payments to fit your income, effectively lower the total amount you have to pay off, avoid bankruptcy, and save a lot of money in the long run. You can consider multifamily construction loans also for this purpose.
However, you need to have a systematic process. Blindly jumping into a new repayment plan without properly assessing your financial health will do more harm than good. Fortunately, we’re here to help. Here’s a step-by-step guide on how debtors can consolidate their debt effectively and efficiently:
Step 1: Assess Your Debt Consolidation Goals
Debt consolidation doesn’t automatically clear debt. Just because it has been useful and efficient for many other debtors, doesn’t mean executing the same tactics will automatically yield the same results for you.
That’s why the first thing you should do is assess your goal. Ask yourself why you need to consolidate your loans.
First, calculate your total debt. Grab out all the paperwork related to your mortgage, credit card debt, student loans, and various other personal loans. You’ll need to review all your secured and unsecured debt.
Pro Tip: Getting the total debt amount is easy since it only involves basic mathematical operations, yet many still decide to delay this step.
Seeing the entirety of your debt can be overwhelming. A good trick here is to have someone else do the math for you.
That way, you can choose to look at the numbers once you are emotionally and mentally prepared.
Next, it's time to review your individual loan plans. Take note of the interest rates, term length, monthly payment dues, and other charges. Watch out for terms and conditions you’d want to change as well.
Finally, assess the findings. By now, you should have a clear overview of all your existing secured and unsecured debt. Honestly ask yourself whether consolidating them all would help you achieve debt freedom quicker, or if doing so will simply waste your resources.
Step 2: Gauge Your Financial Standing
After identifying your goals, it’s time to determine your financial standing. This step is crucial to gauging whether debt consolidation is really the best option for you or if you should consider other options. Below are some of the factors to consider:
Credit Score
One of the first things creditors will look at when you’re consolidating your debt is your credit score. Ideally, you should have a credit score of 580 to 600. Any lower than that and you might have a difficult time getting approved for a personal loan at most commercial banking institutions.
Monthly Income
Banking institutions have varying income requirements based on the debt you’re consolidating. Generally, high debt amounts will lead to higher monthly payments, so the lender would require an equally high cash flow to support the loan dues.
Emergency Funds
Debt management strategies are great, but don’t forget about your emergency fund. Make sure to set aside enough money to cover six months’ worth of household expenses.
Having an emergency fund ensures that you and your family are financially secure and safe even if you lose your main source of income or encounter unforeseen expenses (e.g., medical bills, car repairs, natural disaster damages). The worst that could happen is to run short on cash during your debt consolidation period.
Household Expenses
Some banking institutions will do a quick survey to gauge the loan applicant’s household expenses. They’d want to make sure that the estimated expenses only consume a certain percentage of the debtor’s declared income.
Step 3: Explore Your Debt Consolidation Options
Once you’ve decided on consolidating your debt, it’s time to go shopping. There are dozens of companies that offer debt consolidation loan products. They range from globally renowned, decades-old banking institutions to small-time online lenders that specialize in working with high-risk clients.
You’d think that having a wide range of options is exciting, but that’s not always the case. For most first-time borrowers, facing too many choices can feel intimidating and overwhelming. The best approach here is to create a list of criteria you can use to narrow down the choices. Here are some factors to consider:
Interest Rates
Only consolidate your debt under a new loan plan that offers significantly lower interest rates. Ideally, the interest savings should be enough to offset the miscellaneous charges. If the interest rates are low but the total debt amount hasn’t changed much, you might want to continue looking for other options.
Term Length
The term length plays a crucial role on the size of your monthly payments. Longer plans have lower monthly payments and higher accrued interest, while shorter terms yield lower total debt amounts and higher monthly dues. Choose which one suits your lifestyle best.
Miscellaneous Fees
Don’t automatically sign up for the first loan plan you see that offers a low interest rate. Always read the fine print. These are cases where creditors trick debtors into paying an unfairly high debt amount by mixing all kinds of miscellaneous fees into their plans.
Step 4: Do a Final Personal Assessment Whether Debt Consolidation Is Right for You
After checking out some of the best personal loans on the market, you should have a clearer idea on whether debt consolidation is the best strategy to execute. Be honest with yourself. Although, you might want to reconsider your decision to consolidate your debt if you have:
A Low Total Debt
If your total debt isn’t that high and you can easily pay off all your dues in less than a year, reconsider debt consolidation. In most cases, debtors will only start seeing the benefits of consolidating multiple loan plans after a year or so when the low-interest savings come in.
Those struggling with short-term debt should consider other strategies, these include the:
● Snowball Method: The idea is to make payments seem easier mentally by focusing on the small, low-interest dues first. Slowly work your way up to the bigger debt. Seeing the list of creditors you owe money to lessen can be quite fulfilling. This is ideal for those who want to gradually ease into their new debt management system.
● Avalanche Method: The avalanche method is the complete opposite of the snowball method. Rather than paying off the smaller dues first, the goal is to take down the largest bill you have that accrues the highest interest. This is ideal for those who are comfortable facing their problems head on.
Poor Credit History
Most commercial banking institutions require loan applicants to have good credit. Unfortunately, a lot of debtors who plan on getting a debt consolidation personal loan already have a poor credit history due to payment delays.
This leaves those who really need alternative debt options in a serious bind.
The good news here, however, is there are companies and institutions that cater to bad credit clients. You just need to know where to look.
Although, be wary of sleazy brands and companies that trick desperate applicants into getting a new, high-interest loan with deceiving terms and conditions. As we mentioned, always read the fine print.
Bad Income-Expense Ratio
Applicants with a poor income-expense ratio should consider alternative debt management options.
Yes, there are institutions who work with bad credit history applicants. However, you might benefit more from another strategy like debt settlement.
Debt consolidation reduces the number of creditors you make payments to every month.
It won’t drastically reduce the total amount you have to pay off. Even with a generous 1% savings on interest, you’ll only shave off a few hundreds bucks from a five digit debt amount.
If you’re short on cash and household expenses are eating up most of your income, we suggest going for a debt settlement.
Negotiate with your creditors directly. Explain your situation with them so they can provide you with alternative payment options that are focused on lowering the total amount you owe them.
Step 5: Send Your Application
Congratulations, you’ve finally decided to get a debt consolidation loan. All that’s left now is to send your application and wait for approval. If you meet all the requirements and criteria mentioned above, your request should get approved in a few days.
Final Thoughts
Debt consolidation is a great way to save money and hasten your loan repayment terms. If executed properly, you’ll be able to achieve financial freedom much faster than if you stuck with your old loan plans from multiple creditors.
However, you need to be patient and objective. As mentioned above, consolidating debt takes research. Rushing will only worsen your financial standing.
Overall, the goal is to find a new lender that’s willing to pay off your existing debt and provide a new repayment plan that has low interest rates, flexible repayment terms, and reasonable monthly dues.
Also, don’t just blindly sign up for the same plan others did. Strive to create unique, personalized terms customized to match your income, household expenses, and lifestyle. Remember: there’s no one-size-fits-all debt consolidation plan.
What do you think are the pros and cons of debt consolidation? Share your thoughts with us in the comments section below!
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