What is Debt Consolidation ?
Debt consolidation is a great option for people who are struggling to manage multiple debts. People who benefit from debt consolidation are those who are paying back their debt at very high interest rates and not seeing any light at the end of the tunnel. Debt Consolidation also helps those who simply cannot afford their monthly minimum payments and are starting to fall behind. Debt consolidation gives consumers a way to simplify their bill paying process and replace multiple bills with just one simple monthly payment. This is typically a lower monthly payment then what they’d pay on their own. It’s also a great way to pay off your debt much faster and save a lot of money in finance charges. If you are considering a debt consolidation plan or simply managing your debts ask yourself the following questions: Is it better for me to pay back the money I have to borrow in one lump sum payment, or know that I can take time paying back the debt over time? Is it better for my budget if I pay back several different loans to different lenders or to keep a more regular one time monthly payment? How’s the credit card debt looking overall- high amounts at high interest rates? Is it to do a low interest rate to avoid high finance charges or do I risk financial trouble down the road if I build up or max our a single credit card?
Is Debt Consolidation for everyone ?
Debt consolidation isn’t for everyone, but it certainly helps many people who qualify. A great candidate for a debt consolidation program would be one with multiple debts ranging from credit cards, personal loans, medical bills, collection accounts and other unsecured debts. Another factor to consider is not only how many accounts you have, but also looking at where the interest rates are at. If your interest rates are over 15%, you’re simply paying too much in finance charges each month, which is a lot of wasted money that should be either going to a savings or retirement account or directly to the principal balance and not to the creditors. Look at how high your interest rates are. Lastly, are you struggling to make your minimum payments, have you already started to fall behind, or are you close to your limits? These are also very good indicators as to whether you’d qualify and benefit from a debt consolidation program. If you suffer from any of the previously mentioned debt headaches, contact a certified credit counselor who will help determine the best debt consolidation program for you.
What are the Advantages and DisAdvantages of Debt Consolidation ?
If you have debt, like most people, it’s important you have a plan for paying off your debt. While we’d love to pay cash, it’s much easier pulling out a credit card, but the credit cards add up. Therefore, between your mortgage, car loan, student loans, etc we need to have a plan for paying off our debt. Most financial advisors and credit counselors will discuss a debt consolidation program or plan to help replace multiple credit card or loan payments into just one simple payment, often with a lower monthly payment. Debt consolidation plans are much better than high interest rate consolidation loans. Here are just a few advantages and disadvantages of a debt consolidation program:
Advantages of a debt consolidation program:
- When you qualify for a debt consolidation plan, you only have one low monthly payment. When you have one low monthly payment, budgeting becomes much easier, and you’ll start seeing your debt paid off in a much faster time frame.
- Interest rates are pre-set by creditors, so a debt consolidation plan will offer you low fixed interest rates until you pay off the debt completely. Lower interest rates will save you a lot of money in finance charges and other fees.
- If you have struggled with credit card payments, or fallen behind on payments Creditors may offer benefits such as re-aging your accounts and waiving future over limit or late fees once you’ve enrolled into a debt consolidation program. If you are receiving calls from creditors you can start forwarding collections call to your debt consolidation company.
DisAdvantages of a debt consolidation program:
- Not everyone qualifies for a debt consolidation program. Likewise, debt consolidation isn’t for everyone. One requirement by the creditors on a debt consolidation plan is that use of cards must be stopped. It is important that consumers looking to consolidate are aware they need to stop increasing their overall debt, which means limited use if any of credit cards. Ask yourself, am I ready to stop depending on my cards and ready to use cash in order to pay these cards off?
- The creditors may place a footnote on your credit report account saying you are using a third party to assist in repayment. The good news is the footnote does not affect your credit score, which is most important.
How Can I Pay Off My Debt ?
Below are different ways to pay off your debt
- Debt consolidation loan: this would be when you take out a secured (tied to some collateral) loan at a (usually high) fixed interest rate to repay your unsecured debts. The key benefits are: One monthly payment and set timeframe.
- Debt Management: this is when you’d work with a debt solutions company or certified credit advisor to help you pay off your debt and set a budget. The key benefits of a debt management program are: Reduced interest rates, late fees waived, calls (if any) diminish, lower payment, and set timeframe.
- Debt settlement: this is also referred to debt negotiation and debt reduction. This is where you have a settlement company with your creditors to lower your payoff amount. The key benefits of a debt settlement program are: Reduce principal balance, reduced payment, and bankruptcy alternative.
- Chapter 13 Bankruptcy: Chapter 13 is a court monitored budget and repayment plan. This is similar to debt settlement, only it has a severe negative connotation and marks on your credit report. Key benefits of a Chapter 13 bankruptcy is: Reduced interest, slight decrease in debt balance, no assets required.
- Chapter 7 Bankruptcy: Chapter 7 is when you surrender assets to a court- appointed trustee who sells them off and uses the proceeds to pay off your debt. This is a very severe bankruptcy which many do not qualify for. The benefits of a Chapter 7 bankruptcy are: Reduced principal balance and reduced interest.
Debt Consolidation examples
Debt Consolidation Benefits
- Lower interest rates!!!!!
- Possible Lower Monthly payment
- One convenient payment
- Debt Free in 3-5 years
- Eliminate future Late and Over limit Fees (when behind)
- Stop harassing phone calls
- Most creditors will re-age accounts back to a current status
Financial Analysis for an Average Client that does debt consolidation:
Debt amount $22,00
On your own vs on a Debt Management Program
Monthly payment $500 vs $562
Avg Interested 20.00% vs 8.00%
Estimated Time to pay of 89 years vs 4 years 10 Months
Total Estimated Cost $81,505.11 vs 32,596.00
Total Savings : $48,909.11!!!