When personal debt starts to mount, it is best to address it sooner rather than later. The longer you allow debt to linger, the more it costs you in terms of interest rate, higher payments, lowered credit rating and overall stress. Consolidating your debt into a single creditor or small group of creditors can be a big part of getting out from under it. But like any other aspect of your finances, it has to be handled carefully. Intelligent debt consolidation presents a sensible solution to the problem. Poorly-planned consolidation methods will only make things worse.
Identification
The best first step to consolidating your debt is to find out how deeply you're in it. Make a notarized list of all of your expenses, the amount of debt you owe to each creditor and the interest rates you pay to each creditor every month. From there, you can determine how much you still owe in total, how much you will pay in interest until the debts are paid off, and how much you need in order to consolidate them into a single payment.
Types
Credit card debt is one of the most prevalent types of consumer debt, and consolidating it is easier than it may be for other types of debt. Select a card card with a low APR, and ask the issuer if you can transfer the balance from other credit cards. This will cut down on higher interest payments while providing fewer debts for you to keep track of. The bad news is that you still need to pay down the debt. The good news is that it will cost you less every month to do so. Bizrate offers a credit card search engine to help you find a card with a low interest rate.
Types
Borrow against existing assets. If approached prudently, you can use your home, your 401k or a life insurance policy as assets to secure a debt consolidation loan. Banks offer home equity loans that let you tap into your house's value, while employers will sometimes allow you to access your 401k plan for the purposes of paying off your debts. With life insurance, you're simply reducing the benefits your loved ones will receive when the policy is enacted. (It's not ideal, but it often comes interest-free, which can be very appealing.) In each case, the goal is to cover as much of the debt as possible while securing a lower interest rate. Pay close attention to the terms of the loan, making sure that the monthly payments are something you can handle and that the length of the loan is crystal clear.
Types
Speak to a credit union or a non-profit credit counseling agency. Credit unions can provide a loan to cover your debts at a lower interest rate than most lenders, and assess lower fees to boot. Non-profit credit agencies exist to help people get out from under their debts. They usually instigate a single monthly payment, which you give to them and they pass on to your creditors. With non-profit agencies, the goal is to reform your spending habits as well, and their approach may be gauged to wean you off of the tendencies which put you into debt in the first place.
Types
Family members and friends can sometimes help you consolidate your debt. If you have a well-off family member who can provide assistance, it can help matters considerably. The down side is that it can cause increased stress and friction, and even lead to the dissolution of the relationship if you aren't careful. On the other hand, friends and relatives can be much more flexible in their negotiations and may prove more understanding than most creditors if you're late on a payment or two. In order to prevent any misunderstandings, you should still treat it as a formal agreement. Write it down and have both parties sign copies, and make sure that you are honorable about paying it back.
Warning
Debt consolidation can effectively treat the symptoms of debt, but the cure itself may be much harder. If you find yourself in debt, you need to take serious stock of your lifestyle and spending habits. Be prepared to curtail your expenditures every month and look for ways to reduce your cost of living. Otherwise, you may soon find yourself in debt again, even after going to heroic lengths to pay it off.
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