Falling into the debt trap can be very easy; but walking out of it can be a real pain. As your needs increase, so will your debts and there is no way you can control them.
First, you need to buy a house; so you get into a mortgage.
Then you need a car and so you go for a car loan.
The day to day expenses keep increasing your credit card bills. But it doesn’t end there.
You may have to go for another loan to get your child educated.
The number of debts keeps increasing, while your income remains more or less the same.
You forget to pay any one of these debts and you are doomed. You may end up losing your home or your car. The only way to make all this easier is to consolidate all your debts.
As the name suggests, debt consolidation refers to a process which combines all your debts into one single payment plan. There are many ways of doing this and in fact you may even find many lenders who will be ready to do it for you. Some of these may even contact you directly, by purchasing your details via debt settlement leads. Nevertheless, before you say yes to a debt consolidation company that comes to you through debt settlement leads, make sure you follow these 4 simple steps:
Step #1: Understanding your debt situation
Every debt situation is unique and you need to understand it thoroughly before you can do anything about it.
- Determine the total amount of money you owe
- Estimate the average interest rate that you are paying on your multiple debts
- Identify and make a list of your due dates
- Check for prepayment penalties if any in your credit terms
This should give you a fair idea of what you need to look for while consolidating your debts. Once you understand your debt situation it is time to move to step 2.
Step #2: Determining the amount that you can afford to pay once your debts are consolidated
This step focuses on understanding your capacity to pay back your debts. There are a number of things you need to consider here:
- Income:Write down the total amount of income that you earn every month. If you don’t get a fixed income, you may have to consider the lowest income that you may have earned over the past 12 months or so. You may end up falling short if you consider the highest income.
- Expenses: Make a list of your living expenses, including your utility bills, property taxes, maintenance charges and the amount that you normally spend on your entertainment. This might differ from person to person depending upon the kind of lifestyle he leads. Once you have a figure, deduct this from your income. This will give you the disposable income that can be used to pay your debts.
- Source of income:You will have to scrutinize your source of income to find out how steady or stable it is. In case your source of income is not stable you may need to put aside some amount of money from your disposable income every month. This should ideally be 30% so that you will be able to manage your expenses and your debt payments during unforeseen circumstances.
- Emergency fund:Everyone needs to have an emergency fund that will help them deal with contingencies. If you don’t already have one, you may have to transfer a portion of your disposable income to this. This will help you avoid situations when you may have to compromise your debt payments.
Never commit all your disposable income to pay off your debts. Make sure there is always a buffer for you to fall back upon.
Step #3: Exploring your options to consolidate your debts
Now that you have analyzed everything it is time that you start looking at the kind of options you have to consolidate your debts:
- Debt Consolidation Loan:Here you borrow an unsecured loan that will help you pay off all your debts completely. For instance, if you have 5 debts that total up to $50,000, you may have to borrow a loan for at least $50,000. Your new lender will pay off all your 5 debts with this amount and you will be left only with one single debt. If you have a good credit score you might even get this loan at a low interest rate, making it easier for you to afford the monthly payments.
- Home Equity Loan:You can tap on your home equity if you want to consolidate your debts. Since home equity loan is a secured loan, you may even get it at a low interest rate. However, you will have to pay it back completely as there is always the risk of losing your home if you don’t.
- Balance transfer:Get a new credit card that comes with a 0% interest rate and transfer your balance to this card. It may necessitate the payment of a balance transfer fee. Although this 0% interest rate scenario is a temporary one, you do get some time to maximize your monthly payments.
- Debt Management:This involves the hiring of a credit counselor whose expertise will help you come up with a perfect Debt Management Plan. This will include a repayment plan that your counselor will get approved through your multiple creditors. Then you will start making single monthly payments to your credit counselor who will then disburse the amount to all your creditors accordingly.
Step #4: Selecting the right debt consolidation option
There is no one debt consolidation option that fits all. It depends on your debt situation and financial situation. There are a few questions you may have to answer before making the right decision with regard to the best debt consolidation option:
- What are the kinds of debts that you owe?
- Are they easy to consolidate?
- Do they have prepayment penalties?
- Do they have interest rates that are too high?
- What is the amount that you can pay every month?
Once you have the answers to all the above questions, it becomes easy to make your choice.
It is not difficult to go with the first debt consolidation agency that calls you through debt settlement leads. However, do find out if this is the right option for you, before making your decision.