Debt Consolidation can offer much needed debt relief, however, if not structured correctly it can end up costing you money and adding to your financial woes.
There are many ways to allocate the funds you receive under the terms of a personal loan. One of the most popular uses for such loans is to eliminate debt. A personal loan offers a great alternative for individuals who are struggling to make monthly payments on too many accounts. The idea is to pay off such debt with a personal loan, then only have one monthly payment to make at a lower effective interest rate than the individual debts.
Some of the benefits of consolidating your debt with a personal loan are:
- Save Money – The one monthly payment is often much less than you were paying before on all your outstanding debts.
- Improve Your Credit Score – Having only one loan payment can also improve your credit score. This is especially true if the other debt was mainly credit card debt with the balance being very close to the credit limit.
So to get the benefit of the above this is how to go about consolidating your debts
- The first step is to make a list of all of your outstanding debt. Make columns for information including the creditor, the balance due, and the interest rate. In the last column calculate the total amount you will pay on that debt making your current payments. There are great calculators to get this information online. These calculators are free and easy to use. To do this, simply type in the balance, interest rate, and monthly payment. In many cases you will be shocked to see how much that debt is going to end up costing you.
- Once you have completed that task, add up the totals in each column. You will need to know the balance due to pay off the debt as this is the amount you will need your personal loan to be for. You also want to remember that overall cost total. It is very important that before you agree to the terms of a personal loan that you have made sure the overall cost of that loan will be considerably less than if you continue to make minimum payments on the debt you already have.
- Assess the costs above If the cost is fairly close or more, then don’t take out the personal loan. It will do more damage to your current situation than good. Find out what the monthly payment will be as well. Imagine your shock if it ends up being more than what you are currently paying out.
Based on your findings above you will be able to take a realistic look at the reason why you have debt that you are having a hard time meeting the monthly payments for. It may be due to a change in circumstances that you had no control over. However, if the reason is that you have poor spending habits then you need to address this issue before taking out a personal loan. Nothing is more upsetting than getting a personal loan to cover your debt, then realize six months down the road that you have ran up a large amount of debt again. The situation with be much more grim now because in addition to paying off that debt you also have a personal loan payment to cover each month.
Enrolling in a debt management course or budgeting class can help you identify areas where you are not using your income wisely. There are also many excellent online resources to assist you. A good exercise is to have every family member write down all the money they spend over a week’s time. You will be amazed to see the pattern of things that are draining your wallet during this exercise, including that daily cup of coffee and eating on the run. This is a great way to get all family members involved in the budgeting process as well as involved in finding better ways to manage money.