A person uses a debt consolidation loan to consolidate numerous debts, such as credit card debts, into one. This allows for one payment a month instead of several monthly payments. With sacrifice and careful budgeting, credit debt reduction can be achieved without loans.
Debt Consolidation Advantages
The first advantage is that a person's debt consolidation loan could have a lower interest rate than the interest rates he is paying on his individual credit cards. By paying onto one loan with a lower interest rate, the credit card debt will be paid off faster than by paying onto several debts and several interest rates. Next, debt consolidation could lower monthly payments, which makes paying off all other household necessities (such as food and electricity) easier. It also makes budgeting for household needs simpler because there is only one debt payment to add onto the plan.
Debt Consolidation Disadvantages
First, a person's debt consolidation loan could have a higher interest rate than the interest rates she is paying on her individual credit cards. Second, there is more than likely a lender fee for debt consolidation services. Finally, debt consolidation can lead to more debt. Often, as soon as a person in debt sees that her monthly payments are lower, she believes she now has extra money to spend.
Qualifying for a Debt Consolidation Loan
To qualify for a debt consolidation loan, the bank will first look into your monthly budget to determine whether you can afford loan repayments. They will also require proof of your employment or income, like pay stubs or last year's income tax return. Lastly, they will ask for a co-signer or collateral.
Credit Debt Reduction
A person can reduce credit debt by taking several careful budget and financial steps. First, someone who has accumulated debt must stop using credit cards. Remove all credit cards from wallets and purses and put them away. Experts suggest freezing them in a block of ice if necessary and keeping them in the deep freezer.
Plan for Debt Reduction
The next step is figuring out debt-to-income ratio. There are programs available on the Internet that can calculate the number. After you've done the math, figure out the details of your debt. How many credit cards do you have and what are their interest rates? On which ones do you have the highest balance? Do they have flexible payments? Is the debt considered to be "secured" or "unsecured"? The next step is to call lenders and talk them into lowering interest rates, which can save a lot of money.
Most importantly, the last step is to plan your attack against debt. Make a chart with goal dates to have your debts paid off. Start by choosing the closest date for paying off the card with the highest interest rate. Determine your monthly payment by dividing the amount you owe by the amount of months you are giving yourself to pay it off. Any extra money you have must go into paying off that debt. Don't forget to pay off the minimum on all your other debts and don't forget to move onto the next one once you've paid off the first. Also, keep your eye on the terms involved with your debts. Sometimes lenders change your interest rates or due dates, simply because they can.
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